Manufacturing sector decline and budget priorities

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The writer is a PhD scholar

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Pakistan's manufacturing sector, over the years, witnessed rapid expansion, with growth exceeding 16% in FY2004. But after FY2005, the growth in this sector has declined due to significant economic downturns. In the last four years, inflationary pressures, import restrictions, depreciating exchange rates and energy shortages caused this sector's performance to deteriorate.

Over the past two decades, manufacturing's share in Pakistan's economy has stagnated. It increased from 9.5% in FY2001 to around 12% by FY2007, but has since remained largely at that level. The sector's largest contributor to industrial output and value addition is still large-scale manufacturing (LSM). But LSM's performance has also been extremely erratic, reflecting issues like growing production costs, inconsistent industrial policies, energy scarcity and low investor confidence. The LSM's contribution to the manufacturing sector has declined from 10.5% in FY2008 to 8.1% in FY2026. Small-Scale Manufacturing (SSM), on the other hand, has grown comparatively steadily over time. Its contribution has grown from 1.1% in FY2008 to 2.5% in FY2026, demonstrating the increasing significance of small businesses and industries in fostering local production and employment.

The manufacturing industry's investment trends also show notable swings. The early 2000s saw significant growth in Manufacturing Gross Capital Formation (MGCF), which measures investments in industrial machinery, infrastructure and productive capacity. Later on though, investment growth became erratic and drastically decreased during recessions. The manufacturing sector's long-term contribution to gross capital formation has decreased, from 20% in FY2002 to 8% in FY2026 - a sign of Pakistan's deteriorating industrial investment trends. The business environment's unpredictability, macroeconomic volatility, inflation, energy-related problems and uneven industrial support policies all contributed to this decline.

Several structural challenges have affected industrial competitiveness, with the high cost of energy among the most significant. At 15.5 cents/KWh, Pakistan's industrial electricity tariff is among the highest in Asia. In contrast, Bangladesh charges 10.1, Vietnam 7.9 and India 10.2. Excessive energy costs discourage investment and industrial growth, increase production costs, and reduce export competitiveness.

In what is another significant obstacle, Pakistan imposes a higher corporate income tax –29%. In comparison Bangladesh levies 25%, the Philippines 25%, Malaysia 24% and Vietnam 20%. High corporate taxes raise operating expenses, lower profitability and restrict businesses' ability to reinvest. As a result, both domestic and foreign investment in the manufacturing sector is discouraged and industrial competitiveness is weakened.

Pakistan's manufacturing sector needs significant policy support in the next budget so as to boost industrial growth, attract investment and foster competitiveness. Reducing gas and electricity rates for businesses should be a top priority. Moreover, the government should rationalise corporate taxation by reducing tax rates, streamlining tax processes and offering incentives for export-oriented production and industrial reinvestment. The budget should include incentives for technology advancement, low-interest financing programmes and infrastructure support for industrial zones in order to boost dwindling investment.

And, since SMEs play a major role in job creation and economic resilience, they should receive special attention through easier access to credit, technical assistance and export facilitation measures.

Additionally, policies that support high-value industries, lower industrial input duties and encourage export-oriented manufacturing can boost industrial productivity and forex earnings. Restoring investor confidence and attaining sustainable manufacturing growth will primarily depend on maintaining macroeconomic stability, consistent industrial policies and a predictable business environment.