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The state of engineering industry

Economic development of a country is directly linked with technological level of its engineering industry

From Shamim Ahmed Rizvi,
 Islamabad
 June 04 - 10, 2001

In the era of Technological Development, the Engineering Industry forms the backbone of the economies of all the industrialised countries. The state of engineering industry describes the status of industrialisation of a country since it portrays the capability to add value to the primary products and of indigenous production of plants and machinery. This can be seen from the case of some newly industrialised countries who could not have attained their present status had they not committed themselves to the development of basic engineering industry followed by production of export oriented engineering goods.

It is a universally accepted fact that economic development as well as defence potential of a country is directly linked with technological level of its engineering industry. This specially applies to a country like Pakistan which does not have abundant natural resources like oil and it derives strength directly from the strength of its engineering goods sector.

The development of engineering industry world-wide is characterised with an all out government support. In Pakistan this support has not so far been so visible if not absent. As a consequence our engineering industry remains far from achieving its true potential in the face of rising imports of capital goods. Due to vested interest the country continues to have basically a cotton based economy which offers limited opportunities for future expansion and growth. For achieving major economic strides it is now essential that our reliance is shifted to other high value added areas like engineering goods industry otherwise we would be left far behind in the 21st century world of science and technology.

Deficit financing, adverse balance of payment situations and inflation are the key factors at the macro level that are responsible for the economic disaster in Pakistan. At the micro level it is our attaching low priority to the development of the engineering industry and the adoption of negative attitude towards a Research and Development (R&D) based policy promote the transfer of technology and development of an indigenous industrial base that have not provided any chance to self-reliance. The net result has been the primary manufactures, low value addition and low level of technology.

For the first 10 years after Pakistan came into being the industry maintained a low profile in the unorganised sector by the indigenous efforts of mistries or local craftsmen or employees of large industries like the Tata Steel Mills or the Gun Carriage Factories in Iadia who had migrated after 1947. It was the late 1950s that large units such as the Karachi Shipyard and Engineering Works were created. It was also the time when large industries started making significant contribution to the economy. The sector was, however, not linked to science and technology which are keys to industrial development for providing the technological backup, technology transfer and quality assurance, which remained non-existent.

Having a steel mill could also have given Pakistan an opportunity to establish the engineering industry, but that too was missed. In 1948-49, the Soviet Union had, as a goodwill gesture, offered to establish a one million ton steel mill for which cost estimates were a mere 50 million, or only Rs. 150 million. Pakistan, submitted it for scrutiny by the Harvard Advisory Group and the World Bank. The result was not unexpected. The cost incurred on the import of steel, when the negotiations broke down with the USA in 1962, was higher than $ 50 million. The steel mills of 1.1 million tons established by the Russians when it went into full production in 1984, had cost Rs. 26 billion.

The delayed availability of steel mill products disbalanced the growth of engineering industry. The high cost of production of steel in Pakistan, compared with the neighbouring countries, was compounded by fiscal anomalies, high cost of utilities, imposing of GST, and free import of steel products. The steel mill can only be viable if its downstream industries are prospering. This is not so, since their requirement of steel is available at priers 25 to 35% higher than in the international market, and they are faced with high electricity, fuels transportation and financial charges, and above all the labour costs.

The local engineering industry is only meeting between 25 per cent to 40 per cent of the demand within country while the rest is being met through imports.

The import of engineering goods electrical, non-electrical machinery, transport equipments and iron and steel manufactures has doubled during last decade and collectively makes up one-third of the total import bill.

Apart from the uncertain availability of the basic raw materials the lack of research and development and the link between science and industry to provide the technological back-up have also contributed for the dismal performance of the engineering industry over the years. In addition, the high cost or electricity, fuel transportation, capital investment and high financial charges have tended to render the locally produced engineering goods incompetitive not only in the domestic market but also outside to make the exports unviable.

The engineering industry in India, on the other hand, has performed well as it has an abundant supply of steel ingots which the country produces. In addition, India has developed a large number of scientists and a chain of R&D organization to provide the technological output towards upgradation and quality control to produce precision goods. In spite of the fact that both Pakistan and India gained independence at the same time, the state of the engineering industry in the two countries differ from each other altogether.

While the Indo-Pak subcontinent had the required infrastructure to some extent, for the industrial sector under the colonial rule. This in addition to political stability and consistent policies has turned India one of the top ten leading industrial nations of the world even though manufacturing contribute 27 per cent to the GDP and employs about 29 per cent of the work force. India's industrial sector earns nearly 60 per cent of its total export earnings. The industrialisation of India could be attributed to the many incentives on all aspects of setting up of industry. For instance, the government provides the capital for industrial investment on easy terms and on much lower interest rates.

The state of Pakistan's economy (mainly agrobased) during the last decade has deteriorated out of all proportion due to rising trade deficit and rising debts principally due to our heavy reliance on imported plants and machinery. Engineering goods was freely allowed to be imported during eightees & ninetees which could easily be manufactured within the country with little bit attention on this neglected sector. According to an estimate about 30 to 35 per cent of total imports comprised of such goods which could be easily manufactured within the country. Vested interest however preferred to import as it provided a cover for over invoicing the imports and thereby fleecing the nationalized banks. Occasional rhetoric were heard about policy decision for developing this neglected sector and at times some half-hearted efforts were made without, however, any worth while result.

Recently President of Federation of Pakistan Chambers of Commerce & Industry (FPCCI) Iftikhar Ali Malik has made concrete proposal to develop this vital sector which has a large potential. His proposals seek to strengthen the engineering base of the country in such a manner as to ensure its gain to the exporters of manufactured goods.

Pointing out that since the textile industry, which is dependent on imports of engineering goods for balancing, modernization and replacement, he has suggested a simple and workable formula to end this heavy dependence on imports by motivating the engineering industry itself in ensuring its substantial growth. Once the national textile industry starts using indigenous machinery and components, it should be possible for it to mount a vigorous effort for increased exports by meeting the sharpening competition in the world market.

Needless to point out that with one industry thus helped to overcome its most pressing problem, a chain reaction is likely to benefit the other segments of the manufacturing sector from the consolidation of the base of the engineering industry. An idea how practical the proposal really is may be had from a cursory look at its salient features. It makes a beginning with the idea of allowing a certain percentage of the export proceeds of engineering goods for duty-free import of raw materials intended for use in the manufacture of finished engineering goods and their subsequent export. So start with, it has been suggested that value-addition may be fixed at 25 per cent in terms of the cost of raw material. To ensure its smooth functioning, issuance of a passbook by the Export Promotion Bureau has been suggested. To be maintained at the bank realising the export proceeds and opening the letter of credit for imports it should do away with the hassle over rate of duty and entitlement.

Nobody seems to have seriously gone in to the details of what has been really hampering the full exploitation of the potential of the country's engineering industry that promises to open the gates of progress for the entire manufacturing sector. One hopes that the PPCCI proposals will now receive the desired attention of the men who really matter.