ON THE STATE OF THE ECONOMY

(Published in the April 2012 issue of “Pique” Magazine)

With the present government’s last budget presentation approaching, the finance ministry finds itself in a difficult position having to justify downward revision of practically all important indicators. And even through this practice has become routine over time, the outgoing year’s revenue situation paints a particularly disturbing picture. With the text net not expanding, exports still without crucial value addition, growth too low to stimulate employment and subsequent consumer spending, it seems a number of factors are converging just as  the general election is approaching. It is becoming increasingly difficult to foresee a situation other than deficits bloating, the rupee weakening further, and a balance of payments crises being triggered.

There can be little doubt that hard times have come upon manufacturing and industry.  Despite hollow promises at the time of the last budget, industry is simply not growing. Therefore, whatever quantum increases in revenue the present environment brings will come from inflation, not any meaningful increase in the productivity or sectoral growth. The agricultural sector, on the other hand, continues to be an untapped resource for the exchequer. The sector in itself comprises an approximately Rs4.5 Trillion economy. Yet contribute zero to the revenue mechanism. Even with the modest taxation rate, it can contribute to the tune of Rs200 billion to the national kitty. Yet there is no political will to posture towards such an arrangement. Similarly, the real estate sector should provide approximately Rs300 billion in taxes.

Unfortunately, the sectors under the text net are either not growing or are in proper recession. In the present situation, it is imperative that political parties from across the spectrum achieve consensus on an action plan to safeguard the economy. It is ironic that political considerations can be compromised within consensus is needed to enhance powers of politicians via arrangements such as the 18th, 19th and 20th amendments, yet there can be no show of unity when economic survival is in question. The way things are going, if we cannot chalk out a coherent strategy detailing how we can increase revenue, stabilise the economy, reduce dependence on foreign resources and protect our sovereignty, we will not be able to overcome the current bout with stagflation for a very long time. If our sovereignty is to be protected, we must propose measures aimed at generating resources from within the country.

At the risk of repetition, no credible start can be made without overhauling the tax structure. Beyond a certain level of earning, all income has to be taxed. Yet we see serious political opposition to the issue of taxing the agri sector. It is the clout that prevents the rich from being taxed. We need to move beyond this point where the rich keep themselves from being brought into the revenue net. Without such measures, the revenue jump required to stay afloat will not materialise. Otherwise, the earning situation will remain chronic. Foreign assistance, so far the main survival line for our economy, is drying out.  Even committed funds are struggling to find their way through. So, we’ll just end up printing more money, with its own inflationary spill-over effects.

Up until now, reserves have been in good shape on healthy export earnings ever since the international price-hike in the cotton market bid up the value of our most tradable goods. But the buoyancy is now beginning to deflate. Remittances have been the saving feature, but by their very nature they are an uncertain long term bet, a phenomenon whose direction cannot ascertained with surety. Once economic and financial security returns to parts of the Gulf and Europe, the remittance trend is likely to alter, with people finding alternate avenues to park their investments. For now, though, our exports are dropping and imports on the rise. And with big IMF payments due, the reserve position will come under immense strain, putting downward pressure on the rupee. After all, we can print more rupees, but we can’t print any dollars. The current state of affairs in not very encouraging.

In this backdrop, the compulsion of a people-friendly election-year budget will further compound problem. Targeted fiscal expansion is an essential shot in the arm for a struggling economy, but when such measures are incorporated an ad hoc basis, they tend to lose significance. The result is further pressure on the government’s reserves. Since our accounts are already in red, the economy cannot really afford populist measures to keep a government in office whose record is already not much to write home about.

Interestingly, our deficit problems have simple, textbook remedies. All they require is political will, if the government is able to follow a simple to-do list, it can bring the fiscal deficit considerably down by the time of the next budget. One, all unnecessary leakages must be blocked immediately, especially needless Rs4 billion annual drain from sick public sector enterprises littered with political appointees. Two, all political stakeholders must be made to agree on the central importance of taxing the agriculture and other untaxed sectors. Three, provinces must build capacity (as well as will) to reciprocate transfer of revenue generation authority via the 18th amendment. Four, industry must deliver value addition to add quality to the export basket. The weakening rupee environment has only one potential upside – increased exports. Unless we make our exports more competitive this advantage will be lost.  Five, prime focus must remain on controlling the fiscal deficit in order to prevent inflation and balance of payment problems. These are seemingly simple steps, but they test the political resolve of the incumbent to the maximum, especially in an election year. At stake is the medium to long term survival of the economy. How the next year plays out will tell a lot.

The writer is General Secretary PML(Likeminded) and former Commerce Minister.