Government machinery lacks the will to deliver

May 29 - June 04, 2006

The focus of the budget should be to improve the quality of life of the citizens by reducing inflation, ensuring quality education, affordable housing and free health facilities, cheap and expeditious justice and better infrastructure facilitating the industries and to the agriculture sector.

In the light of these proposals the PAGE magazine has had a discussion with the chairman of SITE association of industry Mr. Ameen Bandukda. Let's listen to his views about the upcoming budget as well as about the economic progress of the country.

PAGE: As a representative of SITE Industrial area, what would you say about the current picture of industries here?

A.B: Currently as you know SITE industrial area is the biggest industrial zone of Pakistan, almost 3500 factories are working under it, it's the highest contributor of the government exchequer also. Its foundation was laid by Quaid-e-Azam Mohammad Ali Jinnah himself. The infrastructure that we had from that time hasn't been improved much since then. Time has passed, new technologies have come about but nothing much has changed as far as infrastructure is concerned. Few things are still lacking, we need to plan proper disposal of waste and garbage which is now a very high priority because of the recent incident that took place. Discussions are taking place perhaps the outsourcing of all the waste of SITE is also being discussed. They are also in the process of treating our liquid waste and affluent treatment plant would probably be now put up in SITE by a foreign company and they will finance the project themselves and then charge SITE Ltd. for its usage even the discussions on it are about to end now. Other problems that SITE is facing are utilities infrastructure like electricity is not available as much as we need, the total requirement of SITE is 400 mega watt of electricity, and today KESC is supplying only 260 mega watts of electricity, there is a short fall of 140 mega watts, then water is a very scarce commodity in SITE as water is not available and water is actually used as a raw material in most of our textiles processing mills, in chemical industries, in beverage industries, we are not getting even half of our total requirement at SITE. Gas is there but gas prices are being hiked up every six months, its become very uncompetitive and very expensive and the cost of doing business is now being increasing not just in Karachi but also in many parts of Pakistan so this in a nutshell is the situation of SITE.

PAGE: As you just mentioned that there hasn't been any improvement in SITE area from the time of its inception however if we look into the history there are many political era's that were considered as the best era for our industries?

A.B. Let me correct my statement, I didn't say that there is no improvement since then but since everything was planned fifty sixty years ago, its outdated and it couldn't keep pace with the time where as the new industrial zone that are being coming up has the latest planning behind them so they are more up the mark than us. SITE industrial area is basically owned by SITE Ltd, which is a government organization and they have budgetary constraints so they don't have the enough money to spend on the upkeep and proper maintenance of this area which is a very big drawback that we have; secondly all the industries of SITE area are paying property tax to the local government or the district government, we are all lessee's of SITE Ltd and we are paying them rent so as such we should not be paying property tax but even though nevertheless if we are paying property tax , it should be spent on SITE, that money which is being collected by the government has not been spent on SITE at all so SITE is basically a resource draft because of which not much improvement is taking place.

PAGE: Now, what loopholes do you see in the budgetary policies that have a long lasting impact on SITE industrial area?

A.B. Basically, in the budget we feel that two things should happened very significantly, one is that the budget should be totally industry friendly because we strongly believe that with the revolution in industrialization, Pakistan can leap to the next league of nation, this is what has happened in Europe and that's what happened in US. You see, if industry grows it generates employment, if industry grows your GDP grows, you have export surplus which you can sell in to international market and you can earn valuable foreign exchange also so we feel that machinery for any industry its export industry, whether its local industry as long as its for manufacturing to be set up in Pakistan and as long as it can generate employment, it should be treated free, facilities should be given to those industries. Government should not make 5% duty on that or they should not even charge any other surcharge or taxes. They should say to put up industries, make money because the more money these industries make, the more investment will take place in Pakistan. There will be more industries that will be set up, more employment will be generated which will boost the economic growth. Second thing what we are looking for is that as you must have realized that the entire taxes of the government is being collected by a small captive segment of manufacturing, industry and salaried class and this is the reason why our tax GDP ratio is very low, it is low as there is a serious anomaly over there, there are various components in the GDP who are not contributing to the taxes for example agriculture is 25%of Pakistan's GDP , among the service industry there is whole sale and retail industry which is 18% of the GDP, transportation is 11% of the GDP however collection of tax from all these segments are minimal absolutely zero so we feel that taxes should be reduced on the salaried class, it should be reduced on the industry and the base should be expanded and get more and more people into the tax net in that way the total revenue will increase for the government and those who are paying taxes will feel happy in paying taxes at a lower rate and they will not feel resentment because they will feel that everybody is paying taxes and it's a level playing field, they will not feel that I am paying all the taxes and there is another person having a great life and enjoying everything, having a Pajero and is paying zero taxes so that feeling of resentment has to go. I feel taxes should not be more than 25 % maximum on salaried class. There are lots of individuals that you see are highly paid professionals like doctors, lawyers, architects, artists they are making huge amounts of money they are tax net. People who are making millions and millions on real state dealing, on stock market operations they are not in the tax net so time has come that we increase our base. Today direct taxes need to be doubled as it is being collected by only 1.3 billion people and tax rate has to be cut down.

PAGE: What do you think why the tax base has not been expanded?

A.B. I think two things perhaps the lack of political will in certain segments for not coming to the tax net other reasons are corruption, third reason is may be complacency as not much noise has been made as has been made recently so all these factors led to have a very narrow tax base and it has fulfilled many people self interest also but now time has come to alter this.

PAGE: Do you think that government is also backing few of these classes to not to pay the tax?

A.B. I will not point out one particular club but yes there are vested interests in every segment obviously they are a powerful lobby and this is the reason taxes have not been levied across the board in Pakistan.

PAGE: Many bureaucrats are of the opinion that there isn't any need for the dramatic changes in the budget, what would you say about it?

A.B. I need there is a very heavy need for a dramatic change, one single change is that this budget should promote equity and justice for the citizens of Pakistan, this budget should make everybody equal in the eyes of law, everybody feels that they are all citizens of Pakistan. It's the high time that Pakistan government should actually invest in the people and the human resource of the country; how much we spent on the education last year 16 billion rupees out of 1098 billion rupees that is 1.4% its peanut. We spent so little on our manpower and on our citizens that human resource could never be developed nor the skilled people and the country will remain the same as it is. We feel that the government should at least invest 50 billion rupees in education in the upcoming budget and the primary focus of the budget should be on technical and vocational training so that the dearth of skilled labor would be fulfilled in that way people who are getting four to five thousand rupees could acquired fifteen to twenty thousand rupees after getting the vocational and technical training.

PAGE: Prime Minister said that this budget would be people friendly with less inflation and low prices, how do you see it?

A.B. I hope so, these are all very good things and this is what we want to have but every time the budget is there, it is being said but this should be the objective of the government whether they will achieve it or not.

PAGE: Do you think that the high interest rates are the only way to control the inflation?

A.B. Well inflation does not happen in one single day, it gradually appears and reach to higher and higher levels so things have to be done on the beginning unfortunately this was not done, the inflation started more than a year ago, at that time our monetary and fiscal policies did not control it, if they have controlled it on that time the situation that we have today would not even risen. Today I agree that inflation is very high one reason for that is the oil and petroleum prices, there are various ways to control inflation, you can control inflation through monitory policy & you can control inflation through fiscal policy, you just don't have one tool even though hiking up of interest rate is also a tool to control inflation but it should be raised gradually and not immediately, earlier it was 4% now it is 9%, you have to control it gradually otherwise what will happen is that you will control the inflation but slow down the economy so it's a cash ready to situation. You want the economy to be running but you want to control the inflation, you cannot kill both of them so that's a very big problem. Another problem about mark up rate is our mark up rates have increased so high because they are linked with KIBOR rates because it being linked to KIBOR it is shooting all the banks and the banks are making huge money. Today if you see that in the last year banks have made huge profits that also done at the cost of industry, the reason for that is that depositor is not getting anything so when you are linking the lending rate to KIBOR you should also link the deposit rate even to the poor people to KIBOR also. Banks should say that KIBOR is this much; KIBOR is 1.5% is the lending rate for who wants to borrow and KIBOR is - 1.5% for those who deposit. This is not happening, if this happen then the banking spread will get rationalized. Today the banking spread in Pakistan is the highest in the world, the only industry that is making huge profits is the banking industry.

PAGE: What budgetary proposals do you have which you think would be most effective if used in the upcoming budget?

A.B. Basically from the SITE's platform we are saying that the main stay of the government's revenue should be proxy in the kind of taxes, income tax, sales tax and customs duty and nothing else; we feel that every other surcharge, taxes in various forms should all be demolished and the government should only concentrate on these three and then nationalized them and make it across the board so everybody so that everybody is on the net. There is still double taxation taking place today for example there is sales tax and then there is excise on certain industries like on the beverage industry, on the cement industry, the cigarette industry, there is no need for that, just have sales tax and abolish excise completely, if you want increase the sales tax for those industries but collect it from one window, don't name it in two different taxes for that amounts to double taxation secondly as I said that increase the tax base, thirdly income tax should be maximum 25% on the industry and on the salaried class on the highest level on the lower level it should be less, GST at 15% is for a poor country is among the highest in the world even in Singapore the GST is 3%, GST should immediately be brought down into 10% in this budget and then ultimately to 7 or 7.5%, that should be the target because don't forget that the GST is an indirect tax and the incidence of all indirect taxes is directly on poor people, it fuels inflation. The rich people are affected less by the indirect taxes than the poor people because everything they buy wheat, sugar, car, rice they pay 15% upfront, immediately it cost to their living. The purpose of levying GST was to document the whole economy because we have a narrow direct tax base and through indirect taxes they brought everybody in, everybody who is not even in the tax base is paying GST however that objective has not been achieved much but the burden of high GST has been put on the masses so the emphasis should be more on the direct taxes and less on the indirect taxes. In Pakistan, 30% of the government revenue comes from direct taxes and 70% comes from indirect taxes, in developing country it is the opposite so the base of direct taxes should be increasing and the base of the indirect taxes should keep on decreasing so this is one thing which in fuels inflation and this is the one way to reduce inflation other than increasing the mark up rates.

PAGE: What influence do you think the law and order situation would have in achieving the pre-mandatory objectives of the budget?

A.B. Law and order situation is directly co related with the optimism about the country and also to the economic performance of the country. Foreign investors and local domestic investors both are affected by this. Whenever the law and order situation is good people would feel the good factor and they want to put in money over there as they feel their life is secure, they feel that their asset is secure and they feel that their money is secure. It is very very important that the law and order situation of the country should always be secure and positive.

PAGE: What would you say about lowering of import duties, curtailment of discretionary powers of tax administrators and the role of CBR?

A.B. I think CBR over a couple of years has reformed to quite an standard impressively so the new chairman Abdullah Yousuf is a very dynamic person and he has come up with so many revolutionary measures, I wish him all the best but a lots more has to be done in CBR; discretionary powers at all levels should be finished because discretionary powers only lead to corruption. Import of machinery for industry should be zero so that industrialization can happen at a very fast pace, import of raw material for the industry and all the raw material which is not been made in Pakistan should be at zero rate. If you want to have duties, have duties on luxury items as luxury items do not create employment, they do not generate production to the economy, they only use for conspicuous consumption which only lead to high trade deficit this year.

PAGE: On macro economic level Pakistan is progressing, how much our industries are supporting the macro economic side if we look at our export index?

A.B. Basically the economic growth that we are talking about as we have 8.4% growth last year which is a very high growth by all standards and even in the region if you see China and India, they have been having this kind of growth, Pakistan is in consonance with that. Industry is always an engine of growth and the driver of economy everywhere, today they are talking about 6 to 6.5% growth, if we are lucky may be 7% growth where from that growth would generate obviously from industry and manufacturing and also from agriculture but I feel agriculture has slow down a bit, agriculture needs to be given a boost. Agriculture also contributes to the economy 25% but the rest of the thing comes from manufacturing and service industry, they are the drivers of economy.

PAGE: Another thing that I would like to ask is about trade deficit, as it is being said that the trade deficit is getting larger even though our exports are getting better. How to bridge in the gap?

A.B. Our trade deficit is getting larger for two reasons, exports are increasing no doubt but imports are increasing on a much faster pace, one sector that is leading to high import is the high oil prices and petroleum. This is our bad luck that the prices have gone up this year. Secondly we are also importing a lot of non productive things, we have automobile coming in for over a million dollar, we are having cell phones coming in, we have got some telecom equipment coming in, and we have got lot of consumer items coming in. Today you go to the market and there you can find five different brands of corn flakes which are all imported which you don't really need so a lot of consumer items such as shampoo, soaps, clothing, footwear, toys so much of consumer item is coming that is actually increasing our trade deficit. This year the stock of 10 billion dollars goes to trade deficit which in the long run is the very dangerous sign. In the short run, I know that government have some resources and they have some non-debt creating inflows coming in which will finance this trade deficit but if this trend continues it will have a dangerous thing for the country and it will be very difficult to sustain it as lot of foreign exchange is going to it. Another reservation that I have is all the inflows that are coming in the country either in the form of foreign direct investment, privatization proceeds and remittances, all this money would now go in financing the trade deficit which is also wrong. All this money should actually go to the retirement of debt and if it doesn't go there but in financing the trade deficit this will not help the country. You can only help the country by reducing foreign debt. This is something serious and it has to be resolved.

PAGE: How would you give the solution to this problem ... I mean at one end financing trade deficit and at other end retiring debt and loans?

A.B. Government has to have two prone strategies, one is to improve your exports by promoting industrialization across the board in the country and reduce taxes, allow machinery to come in, allow raw material to come in without any duty so that you have export surplus. Today we don't have export surplus. Also control wasteful imports. If we control it then trade deficit would come in manageable limits. However after the WTO signing the government is also under compulsion as we couldn't have high duty rates for even consumer items, we have to allow access to foreign goods. But there are ways and means of circumventing that but it needs proper planning too.

PAGE: Whenever we talk of economic growth, textile industry is the only industry that comes to our mind. How long do you think Pakistan can sustain by relying on one single industry?

A.B. Pakistan mainstay today is definitely textile and textile industry is around 60 to 65% of Pakistan total industry and one reason for that is cotton is indigenous so we have the advantage of having local raw material. Pakistan is considered as a fifth or sixth biggest cotton producers of the world so that advantage has to be maintained so textile industry would always be a very important industry for years to come so it should be promoted also but having said that other industries should also be promoted as well. We shouldn't close our eyes towards other industries. The world is now going into high tech things; the world is going into engineering. Pakistan has to start developing engineering industry very soon and our mainstay should be textiles plus these industries. Though textile should not be ignored or neglected at any cost.

PAGE: What would you like to say about the Export Refinance Scheme, in what way it is supporting our industries?

A.B. Export refinance scheme (ERS) is actually a subsidy for exports. The purpose of ERS is not just to give loans to exporting industry but to have a cost to the government to subsidize it so that exports of the country could benefit; they could become competitive and they could compete in the global market and what is the advantage of these exports is foreign exchange for the country. Export refinance was given to the export industry and they were told that you have to export twice to what you get. If you get five crore rupees from the bank of export refinance you have to in turn gives ten crore rupees other wise they would be under so many penalties and surcharges. It has a lot of benefit but when you are asking for benefit you should give it at a subsidized rate. If you would jack up the export refinance and make it at par with the normal borrowing then there is no incentive for export refinance.

PAGE: What hopes do our industries keep to have a sustain growth on long term basis?

A.B. We are optimistic, the government us running smoothly and if the momentum of growth continues for the next five years then Pakistan would benefit from it but if the momentum does not continue for another two years then things will be very pessimistic.