2005-06 in Perspective
By Shahid Kardar
budget announced on last Monday is in many ways
a finely crafted growth and export-oriented budget.
Its very positive features include the those that
have a direct bearing on this sustainability of
growth, higher exports, higher allocations for development,
tax concessions, reduction in duties and reliefs
for low income groups.
These are evident from: a) elimination of GST on
inputs of the textile, leather, carpet and sports
goods industries. This indeed is a major step that
will reduce the cost of doing business. In particular,
the textile industry that exports 95 per cent of
its production will be saved from the drudgery of
obtaining sales tax refunds. b) Reduction in the
rates of individual and corporate income tax. c)
Rationalization and reduction of customs duties,
particularly for inputs and machinery of the agriculture
sector. d) A sharp increase in development expenditures
(although this begs the question if a government
machinery that has failed to make much headway in
the execution of the significantly smaller development
program for the year just ended, can implement a
program of this increased size.).
This discussion will, however, focus on the areas
on which the budget speech chose to remain silent.
To begin with, despite the several welcome tax concessions,
it is assumed that the healthy increase in government
revenues will come from growth and improved administrative
efficiency, although the tax-to-GDP ratio may, in
fact, continue to remain stagnant, if it does not
actually fall. Whereas on the face of it, the assumption
is not unreasonable, much will depend on the tax
collection capabilities of the CBR during the year,
since revenue collection during the last two years
has not matched the growth in those sectors and
sub-sectors of the economy liable to both income
and sales taxes.
It will take time to put the genie of inflation
back into the bottle. There is a huge monetary overhang
that will take its time to work through the system,
keeping the rate of inflation high for much of the
year. Better monetary management will be required,
which in turn will call for a further tightening
of interest rates (including making them positive
in real terms as currently they are below the rate
of inflation) that would most probably affect investment
levels and thereby the growth rate. In any case,
it is not quite clear how the economy, with little
spare capacity, can be expected to grow at seven
per cent, with an even lower savings and investment
to GDP ratio.
Moreover, managing the impact of higher interest
rates on consumer finance will be a trifle tricky.
Apart from affecting their capability to service
existing loans, it would make consumers shy of additional
borrowings thereby reducing the demand for consumer
durables that had fuelled both demand and production
of these items through cheap finance in recent years.
The third area of concern is the huge trade deficit
which would be expected to widen further, at least
in the short-term, because of the lowering of import
duties, although some of this would also benefit
exports and thereby partly have a salutary impact
on export earnings. Whereas this deficit will have
to be met from remittances and external borrowing,
one factor constraining growth in exports that is
not being acknowledged is the overvalued exchange
With our inflation rate substantially higher than
that of our competitors and trading partners, the
will have to bite the bullet and allow the rupee
to depreciate by at least five to six per cent in
order to maintain international competitiveness
and the profitability of exports for Pakistani exporters.
Of course, the downward adjustment of the exchange
rate will increase the cost of imports, thereby
feeding inflation as well as adversely impact upon
confidence in the currency. But there is hardly
any option left on this front, and the quicker this
revision is effected, the more manageable will be
the side effects.
How will the government enforce the minimum wage
of Rs3,000 considering its miserable failure in
implementing the minimum wage of Rs2,500, announced
as far back as 2001. As it is, the minimum wage
law does not extend to agricultural workers while
the government has exempted itself from the ambit
of the law. Nor does the government require its
contractors on infrastructure projects to pay their
laborers minimum wages. Therefore, it has no moral
authority to ask others to implement it.
Moreover, even the new minimum wage of Rs.3,000
per month will fail to compensate workers for inflation,
thereby failing to protect the living standard of
workers, a professed objective of minimum wage legislation;
the 1992 minimum wage of Rs1,500 adjusted for inflation
works out to Rs3,875 in 2005.
Our findings from the government’s labor force
survey of 2003-04 are that the wages of elementary
workers, the focus of the minimum wage legislation,
grew only slightly, resulting in a large erosion
of real wages from Rs2,671 in 1997-98 to Rs2,374
in 2003-04, i.e. real wages are lower in 2003-04
than in 1997-98 in both urban and rural areas, even
before the double- digit inflation of 2004-05 hit
In fact, 26 per cent of all wage earners and 14
per cent of regular workers were earning less than
the prescribed minimum in 2003-04, highlighting
the poor implementation of the minimum wage legislation.
Finally, the perception that will gain wide currency
will be that the incentives to invest in speculative
and non-productive activities (like real estate)
continue to be stronger than those for investments
in real and productive sectors of the economy; and
that the bulk of the budgetary benefits and incentives
are either meant for affluent segments of the population
or those occupying the ranks of the civil and military
bureaucracies, the assemblies, and their friends
and relatives. The gap between the rich and poor
will widen, and regional disparities will be accentuated
as more and more resources are retained by Islamabad
for funding its own portfolio of development schemes.
The writer is former finance minister, Punjab.