Shrinking LSM & Economic Woes

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The purchase power of people has been adversely affected due to currency depreciation and higher inflation. The shrinkage in large-scale manufacturing (LSM) industries is a matter of grave concerns for the rational economists as the sharp decline in LSM output may heighten the risk of a prolonged economic slowdown besides increasing unemployment in the country. In the last fiscal year, LSM sectors dipped by 3.64pc against the target growth of 8.1pc, whereas the government has set LSM target of 3.1pc for the year 2019-20. The LSM constitutes 80pc of manufacturing and 10.7pc of the overall GDP.
There are a number of factors which contributed to the slowdown in the growth of LSM including lower PSDP expenditures compared to last year, slowdown in the private sector construction activities and rupee depreciation. The rise in electricity and gas tariffs has hit all industries. Secondly, there has been a big hike in interest rates, from 5.75% to 13.25% in one single year and this has also reduced the demand for consumer credit. Third, there has been an increase in tax rates in the Federal Budget of 2019-20, adding more burdens to existing taxpayers and also it hit a number of industries like textiles, vegetable ghee, sugar and automobiles.
The Automobile prices witnessed multiple upward revisions due to PKR depreciation which held the potential buyers refrained from making booking and purchases. Similarly, certain restrictions on non-filers with respect to purchase of cars further reduced the automobile demand.
Pharmaceutical also suffered due to a considerable lag in regulatory adjustments in prices. This pricing issue was in addition to weakening of the local currency, which added to the distress of an import dependent sector. The slowdown in LSM has affected the small and medium industry, SME sector.
The small and medium units like auto-part producers who are part of a supply value-chain and sell their goods to the large-scale industry are affected the most because of the ongoing demand contraction for the last one year. The business confidence is dipping and the job market is weakening. If the slump continues in LSM sector, this will add more unemployment and put a negative impact on tax revenues as large-scale manufacturing sector contributes almost 70 percent to Federal tax revenues.

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