Economic & Business Review 060709

8/8/2019 Economic & Business Review 060709

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Economic & Business Review

Opting for ethanol mixed fuel

COULD a project that failed earlier succeed now

with the government institutions deeply embedded

in a culture of patronage?

The switch-over to E10 petrol is easier said than

done. This is possible, however, if the government

sticks to its guns with a strong political will.

The economic coordination committee of the

cabinet on May 19, 2009 took a decision to

discourage export of raw molasses by clamping 25

per cent duty and approved a proposal to change

the fuel composition by mixing ten per cent

ethanol.

The decision is said to have been taken to follow

the trend in international energy market, curtail

dependence on fossil fuel and improve the

environmental standards. Ethanol mixed oil is


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considered to be environment-friendly. It reduces

the carbon content in fuel. High carbon content

leads to emission of pollutants when oil is burnt.

It looks logical to opt for alternative energy oil as

imports have proved to be a major drain on

foreign exchange reserves. The average oil import

is $8-9 billion per annum. Last year, at one point

oil was selling at $147 per barrel and Pakistan

spent huge $11 billion on oil imports.

About $1.1 billion could have been saved by using

E10. Brazil uses E90 and India, Thailand,

Philippines and a number of oil-deficient

environment-friendly countries are at different

stages of the switch over. Many nations import

raw material (molasses) or the finished product(ethanol) for using it as an alternative fuel.

Pakistan enjoys natural advantage to move

towards more sustainable energy options, with a

good potential to produce both raw material and

the finished product. We have a sizeable

sugarcane production. There are about 80 sugarmills of which about 19 have distillery units.

According to industry sources, these distilleries

are sufficient to meet the local demand of


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providing ethanol in required quantity. In case of

scarcity, more mills can install dehydration units

at marginal cost. It would increase the demand of

molasses that is currently exported raw tocountries in Europe that charge very high duty on

import of value-added ethanol from the same

origin.

I see it as a failure of the commercial policy that

the government was unable to avert duty imposed

by EU on ethanol imports. These countries import

Pakistani molasses cheap and process them

there, said an MD of a big sugar mill.

Export earnings from molasses almost doubled

from $44 million in 2007-08 to $88 million during

the first 11 months of last fiscal.

Many key players in the oil sector have not yet

been informed of the decision taken five weeks

back.

Secretary Cabinet, Zafar Mehmud told Dawn that

the decision was conveyed to the ministryconcerned. He was, however, not aware if any

official notification had been issued by the

ministry.


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S N A Zaidi, Secretary General, Oil Advisory

Committee said that no notification had been

received by the organisation or any of its

members.

However, some higher-ups in refineries informed

this scribe privately that notification had been

received but they did not see its implementation

anytime soon.

There are both quality and logistic issues

involved here. The government would need to

resolve many hitches before the decision is

implemented, CEO of a private refinery

confided.

K Iqbal Talib, chairman Pakistan EthanolManufacturers Association blamed oil sector and

the petroleum ministry, for lack of progress.

They created hurdles because they felt the move

would end their monopoly over the energy sector.

Every time the government wants to introduce

alternative solutions to lessen dependence on fossilfuel, they get activated. They spare no trick and

usually succeed in persuading the government to

refer the issue to some committee, he said.


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It is incorrect to call the earlier experiment with

E10 a failure. It was a six month project that

generated data and a report was developed with

involvement of all stake holders and that wassubmitted to the government last year, an insider

told Dawn.

A decision to promote the use of E10 was taken

back in 2005. In August 2007, former prime

minister Shaukat Aziz inaugurated a PSO petrol

pump that installed dispenser to sell E10. Some

selected PSO petrol pumps in Karachi, Lahore

were also equipped.

Despite a favourable post-experiment report, the

distribution was subsequently stopped.

Shahid Hamid, ex-CEO Alternative Energy

Development Board, said that vested interests did

not allow a perfectly viable and sustainable energy

option.

The oil sector is part of the energy problem.

Because of their immediate private interests theyare bent upon compromising the countrys long-

term interests, said Shahid Hamid from

Islamabad over phone.


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Our sources in the sugar industry confirmed that

the country has capacity in place to meet the

demand of ethanol locally.

The sources in the oil refineries who spoke to

Dawn on condition of anonymity, said it was

wrong to blame them for the incompetence of the

government.

It is not a joke. A lot of logistic and legal

adjustments will have to be made to switch to E10.

The level of sulphur content in oil products will

have to be reduced before ethanol mixing is done.

To this end, oil refineries will be required to make

investment of roughly about Rs40-45 billion. The

current oil price structure does not allow them to

spare that kind of amount for modernisation, aspokesperson of the oil sector said.

If there is political will everything else will fall in

place in due course and the transformation

towards greener energy source could be made.

The government must let the

ministry of industries handle the project this time

round as the petroleum ministry was not able to

deliver the last time, a pro-E10 enthusiast

commented.


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Experts agree that there is a need to work on a

price formula and to revise the legal framework

governing the industry. A gradual shift shouldstart forthwith accommodating genuine concerns

of all stakeholders.


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Creating a vibrant domestic market

By Nasir Jamal

Monday, 06 Jul, 2009 | 01:20 AM PST |

The trade policy for 2009-10 is expected to spell

out a long-term vision for boosting domestic

commerce to create new opportunities for

investment and push sustainable and pro-poor

economic growth.

The role of exports as the driver of economic

growth is exaggerated, many economists and

businessmen argue. It is always a vibrant domestic

market that drives economic growth and exports,they insist. Both internal and external trade, they

note, should get equal treatment as they represent

two sides of the same coin.

There is no use formulating export-centric trade

policy each year. Other areas of the economy

should also be targeted for sustainable growth,says an economics teacher at a university.

He considered the government policies subsidising

the industry and exports as flawed and


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imbalanced. It is high time that the government

shifted its focus from the industry and exports and

gave equal importance to the promotion of

domestic commerce, he said.

Former Pakistan Institute of Development

Economics (PIDE) director Dr Nadeemul Haq,

who has done extensive work on domestic

commerce, told Dawn last week that the

forthcoming trade policy could prove to be a new

beginning, a departure from the previous ones.

But, he warned, the policy makers would have to

give up their obsession with export promotion.

The new trade policy should focus on outlining a

long-term vision as to what the government wants

to or intends to do over a period of 15 to 20 yearsto promote domestic commerce and internal trade

along with foreign trade, he said.

The trade policy, he said, must also elaborate the

provisions of the import policy besides explaining

as to what the various export promoting bodies,

including the Trade Development Authority ofPakistan (TDAP), had achieved so far after

spending so much of the taxpayers money. The

people have a right to know it, he observed.


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Domestic commerce which is half of our economy

and the largest employer outside agriculture, has

remained neglected in our economic and trade

policies for far too long, Dr Haq argued.Domestic commerce -- retail/wholesale,

transport, construction, leisure/hospitality

industry -- is severely constrained excess

demand for office space in every city, excess

demand for retail space is visible in all

marketplaces, our freight transport is in a poor

condition. There is no room in our cities for large

showrooms or space for warehouses or well

stocked department stores, he said.

The commerce ministry says, the new trade policy,

expected in the middle of this month, will contain

several measures for the promotion of domesticcommerce. But a few believe.

The ministry under Humanyun Akhtar Khan had

produced a detailed study on the state of domestic

commerce in 2005. The study had highlighted

numerous regulatory, tax and other issues

stunting the growth of domestic commerce,particularly retail/wholesale sector, transport,

construction, warehousing, etc. But it was put in

the cold storage and no policy measures were

taken on the basis of its recommendations,, said a


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leading Lahore businessman.

Where are the cold chains and warehouses that

the successive governments promised to createduring the last one decade?, asked the

businessman. The infrastructure that is required

for boosting internal trade is also crucial for

increasing exports. You cannot de-link external

trade from internal trade, he added.

Dr Haq said the products that were not tested in

the domestic market could not develop brand-

names or fetch much value in the international

markets.

McDonalds first became popular in Chicago

before expanding into Illinois and other states ofthe United States. It was long after McDonalds

had created a goodwill for its brand-name in the

home market that the company thought of

expanding into the rest of the world, he noted.

But, he said, Pakistani manufacturers had never

thought of producing for the domestic market

because they have become used to living off thegovernment subsidies.

According to Dr Haq, the bureaucratic controls

on the economy skewed import policies aimed at


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protecting inefficient and uncompetitive industries

like car assemblers and an anti-commerce bias

were also responsible for the stunted growth of

domestic trade. For example, he said, theprotection given to the car industry had blocked

the way of import of trucks, cranes, and other

machinery needed for the development of cargo

transportation. The obsolete city zoning, which

protected the large residential estates of

bureaucrats and their polo and gymkhana clubs in

the heart of major cities like Lahore, had not only

left no space for shopping malls, warehouses,

offices etc but also driven the poorer people to the

peripheries of the city.

He is of the view that the change in the zoning

laws and lifting of government controls thathelped it subsidise and protect incompetent

industries could help a lot in promoting domestic

commerce.

The shifting of focus on domestic commerce, said

Dr Haq, would lead to pro-poor inclusive growth.

But the first step towards this end, according tohim, lay in promoting domestic commerce and

reforming civil bureaucracy by monetising its

perks.


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Issues in rice export

By Mohiuddin Aazim

Monday, 06 Jul, 2009 | 01:20 AM PST |

RICE exports exceeded $2 billion in fiscal year

2009 (despite a fall in international prices) against

$1.8 billion a year ago. Exporters hope to meet the

export target of $2.5 billion for FY10 if riceproduction remains stable.

Rahim Janoo, who heads Rice Exporters

Association of Pakistan (REAP), said that the

average price of Basmati hovered around $1500-

$1550 per tonne in FY08 but fell dramatically in

FY09.

A former REAP vice -chairman Abdul Baseer said

that the average price of various varieties of

Basmati ranged between $1000-1250 per tonne in

FY09. The Food and Agriculture Organisation

also reports that export price of rice from allexporting countries including Pakistan began

sliding from June 2008 after peaking in May.

Market observers believe that rice exports would


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touch $2.5 billion if production does not decline

below 5.7-5.9 million tonnes and if global prices

remain stable or show some growth.

According to official estimates, rice production

totalled 6.9 million tonnes in FY09 up from 5.5

million tonnes in FY08. But the accuracy of data is

under question. Many a times, the government

presents a higher estimate of production but then

we hear that rice is not available, laments H. A.

Majid, ex-chairman of REAP. Our agencies need

to revamp their data collection system.

Commodity experts say rice exports can grow

faster if Geographical Indication of Basmati is

established. Unlike India that has registered GI of

Basmati in its name, Pakistan is yet to do it. ThePresident can do this by issuing an ordinance or

the parliament can pass it into law, explains Haji

Azhar, a former REAP chairman . The absence of

GI constrains exports of rice to EU member

countries.

Comparatively Basmati is expensive compared tonon-Basmati varieties. So a significant increase in

its share in total rice exports could earn far higher

foreign exchange.


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Rice exporters say, they are lobbying with the

government for reduction in withholding tax on

export of rice in retail packing. They are critical

of the government for not doing so in the budgetfor FY10. We hope that it would be announced in

the trade policy, Rahim Janoo said adding that

REAP has recommended reducing of withholding

tax on retail packing to half per cent against one

per cent on bulk packing. The cost of exporting

rice in retail packing is higher than exporting it in

bulk, he explained to justify the exporters

demand.

Lately, Pakistan started selling rice in retail

packing to some non-traditional markets like

South Africa, Singapore, and Dubai. A minimum

withholding tax on rice in retail packing wouldencourage exporters to sell larger quantities of

rice directly to big trading houses and chains of

retail outlets in non-traditional markets. And as

rice in retail packing is costlier than in the bulk,

an increase in its export would translate into a

higher per unit price.

Pakistan has lately focused on export of rice

products like rice cakes and crackers and rice

vermicelli etc. Exporters say export of rice oil can

also fetch some foreign exchange but oil-


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extracting machinery is expensive. Japan being

the only major user of rice oil has sold oil-

extracting machinery to Indian businessmen with

the arrangement to buy back rice oil. Pakistan canalso try this arrangement.

As for FY10, most rice exporters feel confident

about growth in exports but some of them fear a

decline in the crop size due to water shortage

and if that happens exports target of $2.5 billion

might slip by.

Boosting rice exports in the medium-term

requires development of new varieties of rice,

particularly those of Basmati.

Pakistan has so far introduced two varieties ofBasmati namely Basmati-385 in 1988 and Super

Basmati in 1996, notes the State Banks annual

report for FY08. On the other hand India has

introduced various varieties namely Dehra Dun &

41, HBC-19 & 41m Basmati 217 and Pusa

Basmati.

Both growers and exporters of rice say the Trade

Policy for FY10 must address the issue. They say

Pakistan also needs to ensure that the seeds of new

varieties, when developed, are not smuggled into


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India. Because India has in the past used our

seeds to develop a new variety of rice and then

brand-marketing it, reveals Abdul Baseer.

Basically, the government and the private sector

need to join hands and identify the obstacles in

developing rice export sector in the medium-

term.

More importantly, REAP requires a new, pro-

active and transparent role in addressing the

issues facing rice exports. Differences among rice

exporters and rice traders take a toll on the

countrys ability to earn foreign exchange. In the

last fiscal year, for example, Saudi Arabia wanted

to import 400,000 tonnes of Pakistani Basmati but

Pakistan could not meet this export order asrival groups of exporters and REAP office-bearers

fought over on how to handle it, an insider

confided.

A Quality Review Committee of REAP certifies

the variety of the export consignments and that

creates room for REAP officials to manipulatethingsand for their rivals to politicise it.

It is also important for growth of rice exports to

take rice growers into confidence in decision-


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Water scarcity and disputes

By Zulfiqar Halepoto

Monday, 06 Jul, 2009 | 01:19 AM PST |

WITH unprecedented challenges of water scarcity

facing the world, some new approaches have

surfaced to tackle this problem.

The terms like river diplomacy and

environmental peacekeeping are commonly used

in non-traditional human security studies as

tension between riparian states mount on water

sharing, environmental degradation, irrigation

and drinking water shortage and decline in food

security.

Recent research studies on water related bodies

warn that the world may be very close to its first

water war due to the adverse climate change,

energy and food supplies and prices, and troubled

financial markets. Water scarcity is leading topolitical insecurity and inter and intra-state

conflicts.

Glacier melting, global warming, water reservoir


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threshold of 1000 cubic meters of water per

person per year in both countries. Pakistan at

1200 cubic meters per capita is slightly above this

water stress threshold.

The Indus River Basin comprises of almost 1.2

million square km in Tibet, India, Pakistan and

Afghanistan. In the Indus Water Treaty (IWT) of

1960, three eastern rivers, Ravi, Beas and Sutlej

were handed over to India.

In the IWT, India has also been allowed to

develop 13, 43,477 acres of irrigated cropped land

on the western rivers without any restriction on

the quantum of water to be utilised. India has

already developed 7, 85,789, acres for which 6.75

MAF has been used. Thus, for the remaining areaof 5, 75,678 acres, 4.79 MAF would be required on

pro rata basis.

Whereas three western rivers, Indus, Jhelum and

Sutlaj were given for the exclusive use of Pakistan

which irrigate 20 million hectares land out of total

69.6 million hectares land; four million hectares ofland is rain-fed.

The source of water for these two nuclear rivals is

Kashmir, which is a jugular vein for Pakistan


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and for India an integral part. In the

Himalayan mountains of Kashmir high altitude

glaciers are melting an at unprecedented rate.This

phenomenon threatens the security of watersupply of hundreds of millions of people.

The local environment of Kashmir and Himalayan

range is suffering from the decades of military

presence--habitats of snow leopards, brown bears,

ibex are also under threat and garbage is being

dumped into mountain crevasses. Conservationists

and ecologists suggest that Siachan Glacier

mountains be declared as peace camp. This

would not only ensure protection of the landscape,

but would offer the possibility of political

peacemaking as well.

Kashmirs strategic position is turning into a non-

traditional human security protection zone in

terms of water and environment. Pakistan is a

rain scarce country and most of its water depends

on melting Siachen Glacier in the Himalayan

mountains in Kashmir.

In 1990, General (rtd) Pervez Musharraf, then a

brigadier under training at the Royal College of

Defence Studies in London, in a presentation,

argued that the issue of Indus waters had the


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germs of future conflict.

On June 18, 2002, Syed Salahuddin, chairman of

the United Jihad Council and the leader of HizbulMujahideen, said Kashmir is the source from

where Pakistans water resources originate. If

Pakistan loses its battle against India, it will

become a desert.

Few months back in Srinagar the chief of the

Peoples Democratic Party (PDP) Mehbooba

Mufti asked New Delhi to compensate Jammu and

Kashmir on account of the Indus Water Treaty.

She described the treaty as discriminatory and

blocking the progress and economic development.

She also came down heavily on the New Delhi-

owned NHPC for its arbitrary exploitation ofthe states water resources. She said the NHPC

was producing 1,500-MW of power from its

projects in Jammu and Kashmir, but it was

sharing just 180-MW with the state.

Pakistan realised this very late that except for

Indus main and Kabul rivers, all the five vitaltributaries of Indus river system (Jhelum,

Chenab, Ravi, Beas and Sutlej), originate in

Kashmir. Perhaps India knew all along, the

importance of Kashmir and therefore it lied to the


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United Nations that it was prepared to hold a

plebiscite in the valley. This realisation has given a

new and a dangerous, twist to the Kashmir

dispute.

India is also in the process of building the 330

MW Kishanganga dam on river Jhelum and the

450 MW Baglihar dam on river Chenab for hydro

power generation, beside Tulbul (Wollar) barrage

on Jhelum for navigational purposes.

Apart from these, Uri II hydro-electric project on

Jhelum, and Pakul Dul and the huge, 1020 MW

Burser hydro dam, both on Marusunder, a

tributary of river Chenab, are in various stages of

planning and execution.

According to the Indus Water Treaty, the country

which completes the project first, will have the

first rights on the river water. Pakistan has

recently awarded a $1.5-billion contract to a

consortium of Chinas Gezhouba Water and

Power Company and China National Machinery

and Equipment Import and Export Corporationto build the 960-MW project in eight years.

Against the estimated Rs13.36 billion cost, the

NHPC received the lowest bid is of Rs29.60

billion. Officials said they are still negotiating with


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the lowest bidder.

On the other hand, the water availability in our

rivers is highly unreliable. The highest annualwater availability in the recorded history 1922 to

date was 186.79 MAF (million acre feet) in the

year 1959-60 as against the minimum of 95.99

MAF in the year 2001-2002. This includes the

Kabul river which contributes a maximum of

34.24 MAF and a minimum of 12.32 MAF with an

annual average of about 20.42 MAF to Indus

main.

The conflict for controlling Indus river basin be

tween Pakistan and India is increasing. In future,

water is going to be a crucial issue in relationsbetween the two countries, perhaps at par with the

Kashmir question.

President Asif Ali Zardari has warned: The

water crisis in Pakistan is directly linked to

relations with India.


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Establishing right to water

By Nasir Ali Panhwar

Monday, 06 Jul, 2009 | 01:19 AM PST |

AVAILBILITY of water in Pakistan has

alarmingly declined from 5,000 cubic metres per

capita in 1950s to nearly 1,000 cubic metres in

2008, because of increase in population, inefficient

irrigation, mismanagement and unequal water

rights.

The quality of environment for the majority of the

population remains poor. Only 36 per cent of

households had tap water supply in 2006-7. Thedifferences between urban and rural areas are

stark as 62 per cent of urban households have

access to tap water, compared to only 22 per cent

of rural households.

Nearly 75 per cent of the population or some 125

million people have no access to clean drinkingwater. The situation is worse in rural areas. Water

crisis has several serious health, social, and

political implications. Water-borne diseases such

as cholera, gastro, diarrhoea and typhoid cost the


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national exchequer 1.8 per cent of GDP (Rs120bn)

annually because of poor access to safe drinking

water and better sanitation. The situation is

becoming precarious with the passage of time.

Budget allocation for water supply and sanitation

amounts to less than 0.2 per cent of GDP. Over 60

per cent of the population gets their drinking

water from hand or motor pumps, with the figure

in rural areas being over 70 per cent. This figure

is lower in Sindh, where the groundwater quality

is generally saline and an estimated 24 per cent of

the rural population gets water from surface

water or dug wells.

The links between water quality and health risks

are well established. According to Unicef 20 to 40per cent of hospital beds in Pakistan are occupied

by patients suffering from water-borne diseases,

such as typhoid, cholera, dysentery and hepatitis,

which are responsible for one-third of all deaths.

Access to improved drinking water was not only a

basic need but also a basic human right and must

be respected.

Poor water and sanitation is a major public health

concern in the country. Water-borne diseases are

responsible for substantial human and economic


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losses. These include loss of millions of working

hours of productivity annually, and associated

costs for healthcare. Sickness of the main bread-

earner can have a severe economic impact on apoor household, and in case of contagious diseases,

may even affect the whole community.

Water crisis is essentially a crisis of governance.

Lack of adequate water institutions, fragmented

institutional structures and excessive diversion of

public resources for private gain has impeded the

effective management of water supplies. The

protection of the right to water is an essential

prerequisite to the fulfillment of many other

human rights. Therefore, without guaranteeing

access to a sufficient quantity of safe water, other

human rights may be jeopardised.

This serves to demonstrate that the issue of water

and human rights is not a radical or revolutionary

suggestion, but merely a new way of thinking

about well established concepts. Formal

recognition of such a right would mean

acknowledging the environmental dimension,more specifically the water dependent dimension

of existing human rights. Moreover, a formally

recognised right to water would make it

increasingly difficult to disregard international


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river basins, lakes, aquifers, oceans and

ecosystems surrounding watercourses. Therefore,

a right to water cannot be secured without this

broader respect. A failure to recognise water as anenvironmental resource may jeopardise the rights

based approach, which views water pri marily as a

social resource.

If we consider the maintenance of adequate access

to and supply of good quality water, we need to

look at how this is to be achieved beyond the

provision of safe drinking water and sanitation.

Maintaining a safe water supply means that

overall river basin management, agricultural

practices, and other works are important.

If we want to mean ingfully strengthen anduphold any right to water, we need to make

certain that river basins and ground waters are

managed in their entirety. Steps need to be taken

to make provision for environmental flows for

healthy river systems, which means to maintain

downstream ecosystems and their benefits.

The global environmental instruments that

incorporate a right to water point to wider

environmental resource management as

important to respecting such a right. Practically,


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what should be assessed is whether adequate

supplies of water of good quality are maintained

for the entire population of this planet, and if not,

how this can be achieved. If we accept that there isa right to water, guaranteeing this right in the face

of increasing populations and increasing

environmental stresses, becomes increasingly

challenging.

Ensuring this right for present and future

generations requires that a long term view be

taken. A greater integration of environmental

principles and human rights principles

particularly the ecosystem approach will be

required.

Water, as an environmental resource, needs to befurther promoted and managed within the

framework of a river basin and ecosystem

approach. The rights based approach is based on

an essentially human centered view as it promotes

water as a social resource.

However, a human right to water would not only

mean the expansion of existing human rights andduties in the context of achieving access to water

by all, but also an acknowledgement that healthy

functioning of river systems and ground waters

are essential for people, plants and animals.


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Dip in the textile export

By Humair Ishtiaq

Monday, 06 Jul, 2009 | 01:19 AM PST |

FIGURES for the last month of the 2008-09 fiscal

are yet to be collated, but there is no ambiguity

about the fact that export targets have been

missed.

These include not just the ones that were set at the

start of the year, but also the revised and

provisional ones that were configured during the

year on the basis of monthly and quarterly

performance of various sectors.

Being the longstanding mainstay of the national

export profile, textiles represent a relevant case

study to make sense of where we might be headed

and what it shall take to reverse the trend. From

around 60 per cent of overall exports in 2007-08,

cotton and its various categories are expected todisplay a 7-8 per cent dip in share this year once

the data for June has been added up.

Another worrying factor in this context is that


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within the textile sector itself, raw material

accounts for as much as 70 per cent of the exports,

while the rest of the 30 per cent includes garments

and made-ups; an indication that value-addition isnot our forte yet.

According to people in the field, there is not much

hope for improvement because, one, the cost of

doing business is higher; two, goods needed for

value-addition machinery, buttons, zippers etc.

have to be imported as opposed to giants like

China which have these of their own; and, three,

because international trade system offers

preferential categories to countries like

Bangladesh which falls under GPS+ that gives it

zero-rated access to European markets.

As one goes around there are two divergent

opinions that one hears on the issue of exporting

raw material instead of making the most of it

ourselves. One group insists on cutting down the

export of raw material and, instead, bringing the

cost down, suggesting that the market of textile

made-ups should be taken to the grassroots byconverting it into a sort of cottage industry. This

can happen through sub-contracting in which

quality control in managed. It would bring the

cost down enough to target the international


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market of finished textile products.

The rival point of view is that by doing so, the

quality factor would come into play and may wellnegate the very purpose. Besides, regardless of

what one might do, China will ahead in terms of

both quality, quantity and per-piece pricing

mechanism. But there are a few things that we can

do to counter the threat posed by Bangladesh,

which in the first half of the last fiscal was the

leading importer of raw cotton from Pakistan and,

together with yarn and fabric, imported raw

material worth about $210 million and used it to

encroach upon Pakistans share in the global

market of finished products.

Mujeeb Ahmed Khan, who heads the WTO Cell atthe Trade Development Authority of Pakistan

(TDAP), thinks it is absolutely pointless to even

make an attempt to cut the local cost factor. There

are two things that he says must be kept in mind

while working out a method of dealing with the

Bangladesh threat.

Labour in Bangladesh is cheaper. If we stop

exporting raw material to them, somebody else

will fill the gap which will work negatively

towards Pakistans own prospects.


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What we need to do is to keep working on

improving our own market access, but, more than

that, we need to strategise our approach towardsthe issue. Locally, we shall go for adopting the

Best Business Practice module at the industry

level, while on the international stage the

government machinery should raise issues that

are of concern to the West; like, for instance,

labour laws and environmental violations.

If we can do that properly and consistently, the

pressure will be on Bangladesh and its cost factor

will experience a spike that will work to our

advantage, says Mujeeb Khan.

What he, and, indeed, others of his ilk, is sayingdoes make sense because it is close to what the

world did to Pakistan in terms of its sports goods

manufacturing sector. It all started in 1995 when

an American news channel attacked a leading

sports brand for making footballs with the help of

child labour in Sialkot. At the time, Pakistan was

producing as much as 90 per cent of worldsfootballs. It was all a home-based activity in which

entire households were involved. Women did it at

their own convenience after taking care of

household chores, men did it as part-time activity


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after being through with their main commercial

engagements, and children did it mostly on return

from

school.

What happened after the intervention turned it

upside down. Afraid of bad press, the brand

managers sitting in the headquarters forced the

local partners to formalise the football stitching

activity by investing money in erecting centralised

units for the purpose. This in a way masculinised

the trade, with children not allowed inside and

women not willing to work outside their homes

because of traditional preferences.

The cost of this implanted corporate structure massive infrastructure in line with the standards

set by the global brands, internal monitoring and

ILO registration was borne by the locals in the

hope that the business will survive.

However, when the cost went up from Rs20-25

per ball to Rs50-55 the assurances by theinternational buyers turned out to be nothing

more than mere verbal commitments.

They shifted their buying elsewhere. It will take a


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Empowering farmers

By Tahir Ali

Monday, 06 Jul, 2009 | 01:19 AM PST |

TO improve farm productivity, the federal

government has started a phased crop

maximisation project-II (CMP).

NWFP project director Allahdad Khan told this

scribe that Rs1bn would be spent in NWFP under

the programme over next five years. He said

Rs151.25 million had been disbursed to the

project management and Rs16.2 million to 50village organisations as a revolving fund..

The CMP project was formally launched in 2007

but initially it started its work this year in five

districts of the province Peshawar, Charsadda,

Swabi, Bannu and Dera Ismail Khan.

The project aims at improving and expanding

agriculture including livestock and horticulture. If

quality inputs are easily and timely made

available at reasonable rates to farmers, and


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proper marketing of produce is ensured, it will

raise their income. Crop-maximisation will be of

two kinds. One, more crops will be grown in areas

(apart from existing ones) suitable to them. Two,efforts will be made to increase per hectare yield

of existing crops, said Khan.

The project will target 32 villages, in each of the

selected districts. So far, 71 village organisations

(VOs) of the 160 targets have been registered. The

organisations are being formed with the help of

Sarhad Rural Support Programme (SRSP). Its

membership is open to small farmers owning less

than 15 acres.

VO is formed with member-farmers giving Rs50

as registration fee and Rs250 as share money peracre on yearly basis for five years. The

government adds a matching grant to this fund

which will be used for buying inputs and giving

credit facilities to member farmers. Farmers will

also be provided training, guidance and credit

facility to start businesses locally to earn more

money for their families. Empowerment offarmers is our motive, said Khan.

The project aims at opening agriculture

inputs/marketing centres for every 5-20 villages


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which will be owned by VOs. This will, it is hoped,

decrease the role and impact of middlemen. The

money earned through transactions and services

would be put at the disposal of the VOs.

The project has conducted a baseline survey (BS)

in five selected districts. This BS will serve as

yardstick for appraisal of the CMPs performance

after its completion.

NWFP has comparative advantage in per hectare

yield (PHY) of fruits and vegetables. In onion,

tobacco, peach and apple, the province performed

well with positive growth of 28.4, 23.7, 90 and 65.7

per cent as compared to rest of the country.

According to the BS, the per hectare yield (PHY)for wheat crop in Peshawar, Charsadda, Swabi,

Bannu and DI K in 2006-07 was recorded at 2218,

434, 1882, 1877 and 1479kg respectively. For

maize, the PHY stood at 1,817; 2,290; 2,067; 1,817

and 1830 in that order.

When Khan was asked why areas where the PHYwas much lower were neglected and instead the

robust districts were selected, he said the

government wanted to attend to the high growth

potential areas first to increase food grain. He


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hoped the PHY would be increased by about five

per cent each year and within the five years, it

would be jacked up by 40 per cent.

Normally project funds are wasted on non-

developmental expenditures, but Khan said in his

project 80 per cent fund would be utilised for

bringing positive changes in the lives of farmers.

The project is part of the public sector

development programme (PSDP) and is

dependent on yearly allocation. If the project is

not dropped with the change in government and

funds are made available, it may prove fruitful,

said a farmer Zawar Husain from Peshawar.

The orange produced in Mansehra, MankiSharif, Rutam, Palay, Swabi, Dir and Ghazi, to

name a few, is of best quality. Swat peaches are

also worlds best but marketing and

transportation are the main problems. We need

air-conditioned vehicles and storage facility.

Similarly, the guava grown in Kohat, Bannu,

Haripur and Dargai are of high quality which canearn precious foreign exchange, said Niamat

Shah, vice-president of the Tillers Association,

NWFP.


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He lamented that old orchards were chopped

province-wide and new ones were not grown.

Soil and climate of the Frontier province areappropriate for year-round agriculture. But its

real potential is yet to be tapped. He said NWFP

could have three to four crops of potato in a year.

One crop could be grown from September to

January, the other from February to July and the

next in May to September in Kalam and the other

in Bahrain from April to July.

The province produced 300 tons of tomato, 350

tons of onions and 250 tons of potato in 2007.

Yield of all these crops could be doubled easily by

meeting the resource needs of the farmers.

The problem is that of the 1.36 million farms

province-wide, 1065 or 85 per cent of them are

below five acres owned by small farmers who have

no money to buy inputs and modernise farming.

The inputs are costly and hardly affordable these

days - a bag of DAP is available at Rs3,000 and

seeds are also costly. Water tax in the province isdouble that of Punjab. These problems will have

to be solved if we want to see the dream of

agriculture growth realised, said Hussain.


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Diversifying the financial sector

By Rauf Nizamani

Monday, 06 Jul, 2009 | 01:19 AM PST |

THE financial system has grown rapidly in recent

years but it is relatively small when compared to

the size of economy and many other countries.

The small size or lack of depth of the financial

sector implies that financial needs of the economy

cannot be fully met and that much of the

countrys potential remains unrealised. Another

drawback is that more than 72 per cent of the

total assets of the financial sector is concentratedin the banks.

The ratio of financial assets to GDP is commonly

used as a measure of development of a countrys

financial system. In June 2008, total financial

sector assets amounted to Rs7.6 trillion. On a net

basis the amount of financial assets is substantiallysmaller, as debt securities and debt are included

as assets of other financial institutions and thus

double counted.


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The stock of net financial assets has been

relatively stagnant if the bubble in stock market

capitalisation is excluded. This means that

although financial assets have grown rapidly innominal terms, they have not expanded that much

in relation to the real economy as measured by

GDP, especially in the last few years.

The financial sector expressed as a percentage of

GDP, is roughly half the size of financial sector of

India or average of all emerging market countries

(EMCs) and represents an even smaller fraction

when compared with China.

The financial sector needs to be almost doubled in

size( in nominal terms) from the present ratio of

112 per cent of GDP to to the level implied by theratios for India (202 per cent) or the average for

all EMCs world wide (216 per cent). Such a

doubling would imply a massive increase in

financial intermediation i.e. financial savings and

credit flows in the economy.

If the financial sector is to reach its potential, itwill require broad-based growth not only of the

banking sector but also of other financial

institutions and markets such as government debt,

private debt, and equity markets etc. Banking


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and some even have access to foreign capital

markets.

The level of financial exclusion from the realsector is dramatic, especially in rural areas. While

two-third of population resides in rural areas only

25 per cent bank depositors and 17 per cent of

bank borrowers are served by banks. In value

terms, the share of rural customers are even

smaller i.e. only 10 and seven per cent of total

deposits and advances respectively. There is a

very low level of branch penetration in rural areas

where there are less than 2500 branches for a

population of 105 million or an average 42000

inhabitants per branch. This has held back the

growth of savings and access to credit.

There is an enormous pool of companies to be

included in the formal financial sector. There are

an estimated three million companies of which

only some 50000 are registered with the SECP

including 650 that are listed in stock exchanges.

Some 80000 companies borrow from the formal

financial sector mainly banks. This implies thatthere is a huge pool of potential company

customers to be tapped by the banking sector.

These are only some of the underserved areas of


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the economy which need the attention of the

financial sector and there is a huge potential for

the expansion of the financial sector.


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World commodities

Oil

Oil prices fell more than $2 on July 2 in the

London market to below $67 a barrel. London

Brent crude dropped to $66.76. Rising gasoline

stocks and a far bigger than expected rise in US

unemployment drove oil markets down.

Some analysts are still relatively bullish, however,

and say the Organisation of the Petroleum

Exporting Countries has been very successful in

stabilising the market.

Oil has rallied from a low of $32.40 in December

last year to highs above $70 a barrel in June,

although it is only around half last Julys record

of more than $147. Over the second quarter of this

year it gained around 40 per cent the strongest

quarterly gain since 1990.

The International Energy Agency, an adviser to

oil-consuming nations, cut five-year forecasts for

global crude demand because of the economic

slump, predicting consumption wont regain last


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years levels until 2012.

The IEA cut its oil demand estimates for every

year through 2013 by about three million barrelsa day, it said in its Medium-Term Oil Market

Report. Consumption will average 86.76 million

barrels a day in 2012, the first year it will rise

above 2008s level of 85.76 million barrels a day,

according to the Paris-based agency.

Oil demand in 2014 will rise to 88.99 million

barrels a day, according to the IEA. From 2009,

when oil demand will fall the fastest since the

early 1980s, that represents an average annual

increase of about 1.4 per cent, or 1.2 million

barrels a day. From 2008 levels it represents an

average increase of 0.6 per cent or 540,000 barrelsa day.

Consumption in developed economies will shrink

1.1 per cent a year to 44.4 million barrels a day in

2014, even under the higher GDP scenario,

according to the IEA estimates. According to the

lower economic growth estimate, OECD demandmay shrink as much as 1.5 per cent.

Demand in developing economics outside the

Organization for Economic Cooperation and


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Development will rise through 2014. Oil use in

those countries will increase an average 2.6 per

cent a year to 44.6 million barrels a day, according

to the IEA.

While the economic slump tempers gold demand

growth, it my also cause supply to shrink as lower

exploration and production spending delays

projects and reduces spare capacity, according to

the IEA.

Supplies from outside Opec are forecast to decline

by 0.4 million barrels a day between 2008 and

2014, compared with six-year growth of 1.5

million barrels a day forecast in the last report,

the IEA said. The biggest revisions are in the

former Soviet Union and North America, whereprojects to develop Canadas oil sands are being

delayed, the IEA said.

The group predicts that non-Opec supply will

peak at 51.12 million barrels a day in 2011 and

start declining thereafter, reaching 50.22 million

barrels a day by 2014.


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Gold

GFMS Limited (formerly known as Gold Fields

Mineral Services, an independent consultancygroup, predicts that identifiable gold investment

will exceed 1500 tonnes by the end of this year.

This estimate would represent a significant 36 per

cent increase over identifiable gold investment

demand in 2008.

In dollar terms, GFMS expects gold investment

demand to increase 57 per cent over last year to

nearly $50 billion. As a result of this surge in

investment demand, GFMS expects gold prices to

break through the nominal high of $1,032 an

ounce, with was set back in Spring 2008. GFMS

reported that global gold demand will experiencea massive increase this year, particularly from net

investment and official coins components as a

result of rising fears over the long-term inflation

threat in western nations.

Investment demand has been one of the main

reason for the rally in gold that has taken the

precious metal from around $250 in early 2001 to

around $940 today.


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Total identifiable gold investment during the first

quarter of this year totaled 595.9 tonnes, a

historical high and increase of 248 per cent

compared to the first quarter of 2008. In dollarterms, this represented a net inflow of $17.4

billion, up from $5.1 billion (or 42 per cent) a year

earlier.

At the same time, silver prices are expected to

outperform gold for the same reason.

In the latest quarterly report, GFMS pointed out

that investment demand accounted for only 50

tonnes in 2008. However, silver investment

demand was quite strong in the first quarter as

investors mobbed the metal as a cheaper

alternative to gold.

Silver investment demand is anticipated to be such

that it could account for between one quarter and

one fifth of total consumption in 2009. Meanwhile,

silver supply is expected to decline this year, with

mine output, scrap and government sales all

softening.

On July 3, in the London market, gold fell below

$930 per ounce as the dollar rose against a basket

of six currencies after a larger than expected drop


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in US non-farm payrolls, which prompted some

buying of the currency as a haven from risk.

The worse-than-expected data spurred safe-havenflows into the dollar, making gold pricier for

holders of other currencies.

Riskier assets, such as equities and some

currencies, slipped in the wake of the numbers.

While gold is often seen as a safe haven asset,

moves in the dollar are taking precedence as the

metals main price driver.

US gold futures for August delivery fell to $930.10

an ounce, down more than one per cent from the

settlement on the COMEX division of the New

York Mercantile Exchange.

In the New York market, gold climbed above $940

an ounce, as news that China has asked to debate

proposals for a new global reserve currency sent

the dollar reeling, highlighting the status of gold

as a hedge against a falling US currency. Investors

have recently viewed the dollar as a safe haven.


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Copper

In the London market, on July 2, copper fell, as

grim US and European data underlined concernthat global economic recovery could be a long way

off and as a firmer dollar added pressure. Copper

for three month delivery on the London Metal

Exchange closed at $5035 a tonne from $5090 a

day earlier.

Copper earlier fell as much as 2.4 per cent to a

session low of $4,966.50. But the metal pared

earlier losses to close about one per cent lower,

with sentiment helped by data that showed new

orders for US manufactured goods jumped 1.2 per

cent in May, their largest increase in nearly a

year. But analysts warn economic recovery is notyet within reach.

A slew of mixed data has provoked erratic trading

trends in recent weeks as investors have struggled

to gauge the economic climate. By and large,

however, sentiment is improving.

Euro zone economic sentiment improved more

than expected in June, data showed on June 29,

while Japanese industry output rose for the third


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month in a row. But policy makers and analysts

stress that a potential recovery would be

complicated and protracted. There are also

worries that Chinese imports will not sustain themarket.

Chinese buying has helped copper rally some 65

per cent in 2009, but this restocking drive is

slowing, and markets are now entering the quieter

summer period. China imported 1.4-million

tonnes of copper in the first five months of this

year.

China had stopped buying metal for government

stockpiles after prices surged and middlemen

cashed in on an initiative meant to support the

domestic industry. Chinas State ReservesBureau amassed a lower than expected 235,000

tonnes of copper in recent months.

Copper still has surged 52 per cent this year,

making it the second-best performer in the

Reuters/Jefferies CRB Index of 19 raw materials.

Only gasoline futures outperformed copper on theCRB index. Record refined-copper imports by

China, the worlds largest user of the metal, drove

much of the increase.


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KESC projects on the back burner

By Engr Hussain Ahmad Siddiqui

Monday, 06 Jul, 2009 | 01:19 AM PST |

KARACHI experienced the worst-ever power

breakdown for almost 36 hours, on June 17-18, as

electricity generation, transmission and

distribution systems came to a standstill.

Civic life, trade, industry and transport etc were

paralysed. Millions braced daily 6-8 hours load-

shedding and frequent power outages.

The KESC blamed the thunderstorm that hitPEPCOs Jamshoro-Dadu and Jamshoro-Hub

500kv transmission lines, for the blackout.

However, PEPCO in turn, criticised the utility for

the absence of any reliable back-up system. The

reality is that the existing electricity transmission

and distribution systems are outdated and

inefficient.

Basically the power crisis is an outcome of the

utility firms inaction to improve its infrastructure

that, once again, highlights the non-transparent


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KESC privatisation. The ownership and

management have changed hands a number of

times unauthorisedly to the disadvantage of the

consumers. The government is not effectivelymonitoring the KESCs performance and ignoring

agreements it had signed with the private sector

owners on divestment and transfer of

management.

According to the Implementation Agreement, the

KESC was committed to invest more than $800

million in three years-from July 2006 to June

2009, which would have resulted in the

turnaround of the company too. The capital

investment programme had three major

components:

* Rehabilitation, augmentation and expansion of

the existing transmission and distribution

infrastructure;

* Rehabilitation, revamping and up-gradation of

the existing power generation capacity at Bin

Qasim power plant, and;

*Creating an additional power generation

capacity of 795 MW, by installing gas-fired

combined cycle power plants at Korangi (220


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MW) and at Bin Qasim (575 MW).

The KESC had announced its plans in July 2006

to undertake overhaul of the entire powertransmission and distribution system and service

lines network and to set up new power plants. The

company has not been able to achieve any

significant milestone by the end of programme

period ending June 2009.

In the first phase, 11kv cables were to be replaced

and 13 new grid stations to be set up and existing

grid stations were to be improved. The system

improvement plan was initiated by the

government in 2004, having allocated Rs22 billion.

The government however had agreed, as per

provisions of the Implementation Agreement, toprovide to the KESC an amount of Rs10 billion as

first installment of 2006-07. The new owners of the

KESC were required to contribute additional Rs3

billion towards implementation of this component

of the development plan.

Only two new grid stations have been completed,whereas work on another two is in hand. Even

land for the remaining new grid stations have not

be purchased. Again, only partial replacement of

11kv cables and distribution transformers and


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installation of new capacitors in limited areas has

been carried out. The company announced in July

2008 that agreements were being signed with

contractors to upgrade existing transmission anddistribution systems. There has been no further

progress in spite of the Asian Development Bank

(ADB) extending $150 million loan in June 2007

for the purpose.

Likewise, rehabilitation and upgradation of the

existing power generation capacity at Bin Qasim

power plant could not be undertaken properly.

The maintenance of various units of Bin Qasim

has deteriorated, resulting in frequent tripping,

and sometimes shut down of the units. A few units

were retired, creating substantial shortfall in

power generation capacity. A sum of Rs12 billionwas to be invested by the KESC management in

financial year 2006-07 for creating additional

power generation capacity as per plan.

There was no progress on the construction of 220-

MW new power plant at the existing Korangi

facilities for long for which the EPC contract wassigned with a Greek company in January 2007.

The International Finance Corporation had

offered $125 million loan to the KESC for its

construction. The plant was rescheduled to be


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operational by March 2008 but yet not fully

commissioned. The combined cycle project,

consisting of General Electrics four gas turbines

of 48-MW capacity each and one steam turbine of28 MW, has been further delayed. Currently, the

plant is operating partially, in simple-cycle mode,

generating 144 MW of electricity.

Tendering process for the gas-fired combined

cycle power plant at Bin Qasim (575 MW) was

initiated as late as in May 2007. It was announced

that contract would be finalised in October 2007.

The new plant would be operational by 2010.

Nothing was heard of this project, until July 2008

when the company announced that agreement was

being signed with the contractor. Though there is

no physical progress on the project, the contracthas been signed for $378 million. Three gas

turbines of 129 MW each will be installed during

May-July 2011, whereas with the installation of a

steam turbine of 185-MW capacity-- the combined

cycle power plant-- will be fully operational in

January 2012.

Aiming to minimise power shortage, the KESC

decided to install a new barge-mounted power

plant of 45-MW capacity, which was scheduled to

be operational by September 2006. This plant,


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2,021 MW or de-rated capacity of 1,625 MW,

according to the recent revisions made in the

generation license granted to the KESC by the

Nepra. The KESC planned to replace old gasturbines installed at Korangi and SITE power

plants, of cumulative capacity of 180 MW, by July

2009, but there are no indications of its

implementation.

Another major cause for power shortfall is that of

heavy line losses due to technical reasons and

power theft. The line losses of over 34 per cent of

revenue in 2005 were targeted by the management

to be reduced to 20 per cent by 2008, but the losses

have instead gone up to over 40 per cent by early

2009. The utility company somehow failed to plan

proper load management, to improve distributionnetwork and upgrade the grid system using

underground cables, as envisaged, which could

have lowered losses.

As monsoon approaches, the KESC consumers

should expect the worst power outages in the

coming weeks, while continuing to sufferpersistent load-shedding. The irony is that the

government remains indifferent to the alarming

situation, except forming a few committees and

issuing political statements. The federal


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government had appointed in May a special

committee headed by the financial advisor

Shaukat Tarin to evaluate KESCs performance.

It has not concluded its proceedings even after alapse of two months.

The reported governments intention to take over

the KESC control again, does not seem probable,

given its special favours, concessions and generous

subsidies to the utility in the garb of ensuring

uninterrupted power supply to the consumers.

It is shocking that the government is privatising

PEPCOs Jamshoro and Photo by Arsalan

Kotri power plant, learning nothing from the

experience of the KESC privatisation.


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Budget to initiate next phase of reforms

By Anand Kumar

Monday, 06 Jul, 2009 | 01:18 AM PST |

THE economic policies of the United Progressive

Alliance (UPA) government (version 2.0) will be

unveiled today by veteran Congressman and

finance minister Pranab Mukherjee, when he

presents the union budget in parliament.

Mukherjee, who handled the key finance portfolio

between 1982 and 1984 when Euromoney

magazine rated him as the worlds best finance

minister was ironically Manmohan Singhs boss

at that time.

The current prime minister was the governor of

the Reserve Bank of India (RBI), the countrys

central bank in the early 1980s, and would report

to Mukherjee. Singh was picked up as finance

minister by P.V. Narasimha Rao after he became

prime minister in 1991, at a time when thecountry was facing enormous problems on the

economic front. Rao then made Mukherjee the

deputy chairman of the Planning Commission,

before elevating him to the cabinet as the external


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affairs minister.

Mukherjees supporters claim that he was the

original reformer in India, initiating the reformsprocess way back in the early 1980s, when the

country was firmly in the grip of the licence-raj

era. The73-year-old politician, who was re-elected

from the Jangipur parliamentary constituency in

West Bengal in May, has been a Congress trouble-

shooter for the past decade, heading innumerable

committees and panels set up to tackle contentious

issues.

Analysts expect Mukherjees maiden budget in his

second-term as the finance minister to be

pragmatic, ensuring a proper balance between the

demands of Indian industry and big business (andreformers), and the pro-poor commitments of the

Congress. Party president Sonia Gandhi has been

emphasising the need for an all-inclusive

approach while tackling the current economic

crisis.

The UPA in its first term (2004 to 2009) initiatedseveral left-of-centre policy changes including

launching a massive National Rural Employment

Guarantee scheme (NREGS) and waiving off farm

loans. Mukherjee is expected to substantially step


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up allocations for the UPAs flagship programmes

in his budget speech on Monday, even at the cost

of widening the fiscal deficit.

Importantly, the government is also expected to

allocate huge sums for a new food security

legislation that would ensure the supply of 25 kg

of rice or wheat every month at Rs3 a kg to every

below-the-poverty-line (BPL) family in India.

Likewise, the government plans to expand its

NREGS programme and also offer incentives to

farmers who have been prompt in repaying their

loans.

Many see Mukherjee as the most appropriate

candidate in the finance ministers post, at a time

when global economic crisis has started hurtinggrowth in India. The minister has his task cut out

for him: accelerating economic reforms,

expanding the allocations for the social sector,

balancing the budget and ensuring rapid

economic growth.

* * * * *

THE annual economic survey that Mukherjee

presented to parliament last week reflects the

dilemma facing the government. The survey


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presents the overall economic scenario in the

country, comes out with suggestions

recommending further deepening of the reforms

process, and also warns about the dangers ofpursuing populist policies.

The speed at which the Indian economy returns

to high-growth path in the short term depends on

the revival of the global economy, particularly the

US economy and the governments capacity to

push some critical policy reforms in the coming

months, notes the survey. If the US economy

bottoms out by September, there could be a good

possibility for the Indian economy repeating last

financial years performance.

For the year ending March 31, 2009, Indias GDPexpanded by 6.7 per cent, remarkable considering

the contraction being witnessed by most developed

economies, but a set-back for an economy that had

been chugging along at over nine per cent over the

previous four years.

The survey notes that there are positive signs thatIndian industry may have weathered the most

severe part of the shock and is moving toward a

recovery. The survey forecasts the economy

could grow by seven per cent, with a margin of


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error of plus/minus 0.75 per cent. But it all

depends on the monsoon. The south-west

monsoon, which sets in over the country in June,

has been disastrous in the first month. Thegovernment hopes there would be good rainfall

over the next two to three months to make up for

Junes deficit.

Mukherjee is cautiously hopeful that the monsoon

would be normal, ensuring a seven-plus per cent

growth in the current fiscal.

But the economic survey does not mince words

when it seeks a further deepening of the reforms

process. India should be back on the new trend

growth path of 8.5 to 9 per cent per annum

(economic growth) provided the critical policy andinstitutional bottlenecks are removed, points out

the survey. It is, therefore, imperative that the

government revisit the agenda for pending

economic reforms in the first instance.

Successive governments in India have realised

that economic reforms can be pursued vigorouslyonly during the first two or three years of its

tenure. The last two years of the five-year term

are spent on wooing the electorate by rolling out

concessions and rolling back some of the reforms


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measures.

* * * * *

LAST week saw the Manmohan Singh

government revert to a much-criticised practice of

raising the price of government-controlled

commodities such as petrol and diesel, days before

the presentation of the budget.

Raising petrol and diesel prices is always a nasty

job for any government in India. When the BJP-

led National Democratic Alliance government was

in power between 1998 and 2004, it faced a similar

dilemma: how to jack up petroleum product

prices to ensure that the state-owned refiners did

not go bankrupt. The Congress, which was in theopposition, would stoutly oppose any such moves.

Now that the Congress-led UPA is in power, the

BJP and other opposition parties are equally

vehement in their opposition to price hikes

though both petrol and diesel are largely

consumed by affluent Indians. (Most MercedesBenz cars, Volvo buses and other high-powered

vehicles in India run on diesel).

The government last week went in for a stealthy


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price increase, raising the price of petrol by Rs4 a

litre and diesel by Rs2. Petroleum product prices

were reduced sharply just before the elections,

with the government citing the sharp fall in theprice of international crude oil over the previous

few months. Last week, it again cited the spurt in

crude oil prices for the increase.

But the economic survey lashed out at the

government for its imperfect handling of oil

pricing. It called on the government to decontrol

petrol and diesel prices, even suggesting that the

price of LPG (liquefied petroleum gas, used for

cooking purposes) should not be subsidised.

Several committees have over the years urged the

government to withdraw all subsidies on petrol,diesel and LPG. Most of the BPL families cannot

afford vehicles, nor do they buy LPG. Public

transport, including railways, is heavily subsidised

anyway, so it is only the affluent who benefit

because of the subsidy in petroleum products.

The survey also urged the government to maintainfinancial discipline by sticking to the fiscal deficit

target of three per cent. Last fiscal, the deficit shot

up to 6.2 per cent as the government went on a

spending spree, investing in social sector projects,


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writing off farm loans and wooing the electorate

just before the elections.

It also urged the government to withdrawsubsidies on a host of other commodities and

goods including sugar and fertiliser and even

decontrol drug prices. Prodding the government

to move ahead on the reforms path, it sought for a

significant hike in foreign direct investment (FDI)

levels in the insurance sector from the current

26 per cent to 49 per cent, and even 100 per cent

in the case of health and weather insurance.

The survey also reminded the government about

the need to push pending legislation relating to

pensions, insurance and forward contracts. Will

Mukherjee, in his second avatar as financeminister, bite the bullet and accelerate reforms?

His budget will reveal his plans for the next stage

of reforms.


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Managing growth with full employment

By Mahmud Ahmed

Monday, 06 Jul, 2009 | 01:18 AM PST |

THE common man is badly hit by high prices and

rising unemployment following a dramatic drop in

economic growth.

Inflation and joblessness directly impact on his

livelihood.If prices go up, his purchasing power

falls. He is most vulnerable to price hikes.

If he is unemployed, there is no source of income

or independent livelihood. Things become worsewhen an educated youth cannot find a job The

investment made on his education becomes

unproductive.

High employment and low wages are squeezing

the consumers purse and also the size of the

domestic market. Unemployment for the poor isworse than low incomes eroded by high prices

Even in normal times, business houses tend to

shed labour while upgrading technology and skills


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under the prevalent flexible labour policy or when

shedding their fat.

They do not offer life- time career. Thegovernment focuses on physical and social

infrastructure projects that provide temporary

jobs. There is no growth strategy to provide full

employment. There is no concept of common good

in government policies formulated under deep

external influences apart from offering doles to

the most vulnerable. It is time to provide the

common man an enabling environment to fend for

himself.

If millions remain unemployed, their labour

cannot be put into productive use, national wealth

cannot be multiplied quickly and the nationaleconomy suffers. Labour, an asset, turns into a

liability. under present economic model. Economic

strategies that do not envisage full employment,

particularly in developing countries with scarce

capital and surplus labour, cannot achieve

sustainable growth.

In the current global crisis of capital, it is the

human skills that have a key role to play, with

ideas and creativity in all spheres and at all levels

of economic activity. With full employment and


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better income distribution, Pakistan could be a big

prosperous market for goods and services

produced within the country. It means focusing on

labour-intensive projects and producing primarilyfor domestic market. Poverty offers economic

agents a massive potential for economic

development.

The current policy package links interest and

exchange rates to the inflation rate. High inflation

rate translated into higher interest and lower

exchange rates discourages investment and

production. Depreciation of rupee encourages

cheaper exports for foreign buyers and costlier

imports for local consumers. It depresses domestic

demand in order to create more surplus for

exports at the cost of domestic consumption. Itmakes the market shrink for domestic production.

While with right policies, increased production

that provides full employment, should increase

supply and stabilise prices. There is no system

better than full employment to distribute incomes.

While there can be no two opinions about the

importance of macroeconomic stability, views can


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differ on how to go about it. The recourse to IMF

credit helps fire fighting and its programme

gives a semblance of stability for a while, only to

be eroded by economic recovery. Only stabilitygenerated from increased production can be

durable as evident in case of China.

No doubt imbalances occur in the process of

economic growth but they become chronic when

they remain unattended and not corrected

promptly. In the recent years, fiscal trade and

current account deficits were allowed to fester in

the pursuit of consumerism, mercantilism and

casino games.

This benefited a renter class. It was a deliberate

attempt to put the country back under the IMFprogramme.

The outcome was: high interest rates, huge

depreciation of rupee, sharp decline in investment,

under-utilisation of industrial capacity and

dramatic fall in growth rate. If a country is under

the IMF programme, the message sent across theworld is that it is in trouble. It scares away foreign

investors.

Instead of raising domestic resources , policy


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makers borrow from the IMF. This reduces the

space for sovereign decision-making and genuine

reforms to shore up the economy.

As a lender, the fund prescriptions are aimed at

improving balance of payment. The macro-

economic stability is achieved at the cost of

economic growth. Other issues are of no

consequence to the fund. And the price is paid by

the common man.

Not too long ago, economists used to say that

rising production increases supply of goods and

services and helps bring price stability. Now

consumers are told that growth breeds a high rate

of inflation. This is the outcome of the Anglo-

Saxon financial model that has dominated theglobal financial market for the past few decades

and is now crumbling under its own weight. It is a

hurdle in turning money into productive capital

and misdirects cash towards speculative activity.

Moreover, the growth under this model spurs

imports, widens trade and current account deficitsand creates an unfavourable balance of payments.

This growth has not come about by boosting

domestic savings, investment, production and

exports. Rather, it is artificially stimulated by


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external capital and financial inflows.

A major drawback in foreign debt-driven

economic growth is that it stalls the need for basicreforms that could help remove structural

imbalances, holding back sustainable economic

and social progress.

Foreign money protects the status quo by being an

alternative option. So, there is no need to tax farm

incomes even when the governments policies have

resulted this year in transferring an extra Rs294

billion to the rural economy. Speculative

investment enjoys a tax holiday while

manufacturing, an engine of economic growth,

provides over 60 per cent of the tax revenue. The

government needs revenue badly to undertake amassive development programme to shore up

economy and provide jobs.

But the tax- to- GDP ratio is constantly declining

and tax revenue is down to nine per cent of the

GDP. Even when the economic growth was high in

recent years, the tax-to-GDP ratio was on thedecline. The efficiency of the tax administration is

at the lowest ebb. Tax collection is over-

centralised with two tiers of the government at the

provincial and district levels dependent on the


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federal government for 90-100 per cent of their

revenues.

In an environment of poor governance, the

federating units and the districts are accountableto an inefficient administrative set-up at the

federal level rather than to the tax payers for

whose benefit they are supposed to work and to

whom they should be accountable.

Officials in Islamabad accuse the provincial

governments of being inefficient and incompetent

while they themselves fail to deliver. The

centralisation of tax collection and distribution is

politically motivated and cannot resolve issues in a

complex and diversified economy.

The unitary system of tax collection anddistribution needs to be abolished.

The over-centralised system denies fiscal

autonomy to provinces and the districts. The

system is not accountable to taxpayers, nor to the

beneficiaries whom it claims to serve from the

revenues raised from taxes .

Over 80 per cent of tax revenue comes from

indirect taxes if withholding tax, passed on to the

consumers as an expense, is included. But the axe


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falls on development programme, particularly in

the social sector, in case of financial constraints,

that too in an age where human resource

development, rather than capital, is the first pre-requisite to modernise the economy. The

regressive taxation system works against the

common citizen.


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Setting priorities for industrialisation

By Shahid Javed Burki

Monday, 06 Jul, 2009 | 01:18 AM PST |

THIS may be a good time to reflect on some of the

basic assumptions that have governed the making

of public policy with respect to industrialisation.

It is now recognised by economists and policy

analysts that industrialisation its pace, scope and

content responds to public policy.

This is one reason why Islamabad, working closely

with the private sector, should carefully define thecontent of public policy in order to determine the

direction the country should take. The focus

should be on three aspects of structural change in

the sector of industry. As industrialisation gathers

pace, what should industries produce?

Where should industries be located; shouldindustrialisation be used to lift the more backward

regions of the country as was attempted during

the period of President Ayub Khan (1958-69) or

should the question of location be left to the


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private sector?

And, where should the products of

industrialisation be sold? The last question leadsto another issue: how much emphasis should be

placed on export promotion as an objective of

industrialiation?

Economists have also begun to recognise that since

countries have different histories and different

structural characteristics, appropriate policies will

differ and evolve differently. There is no one-side-

fits all public policy approach to industrialisation.

In Pakistans case, the initial direction of

industrialisation was influenced by the trade war

with India that broke out in 1949 over the issue ofthe rate of exchange between the currencies of the

two countries. For legitimate reasons, Pakistan

had refused to devalue its currency with respect to

the dollar, a step that was taken by all countries of

the British Commonwealth.

That changed the rate of exchange between thetwo c

Economic & Business Review 060709

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