THE CASE FOR RATIONALIZATION OF

BY

M A J Y D A Z I Z

It’s pre-budget time again and the newspapers are full of news and views about the coming budget. There are press statements pleading for reduction or increase in duties, there are calls for deferring the sacrosanct General Sales Tax, and there are leaks and rumors regarding the expected increase in infra-structure rates, etc. Very shortly, there will be the usual brouhaha that many items are unavailable cause they are being hoarded by the profiteers. The same old, hackneyed scenario is repeated every year come budget time.

A few days ago, there was a news item that the government has agreed in principle to finally reduce import duty on man-made yarn because the Export Promotion Bureau has at last caught up with reality and has painted a very morbid picture of the synthetic textile industry’s exports. The EPB, struggling strenuously to attain the exalted export target for 1995-96 cheerfully set by the Minister for Commerce at around US$ 9.2 billion, has sounded the alarm. The synthetic fabric exports which were $ 648 million dollars in 1993-94 had skidded down to $ 575 last year and the figures for this year will be a low, low $ 450 million. It means that in two years the exports will have gone down by over 30 %.

The EPB has rightly come up with the proposal that to rein in the declining trend of synthetic fabrics exports it was imperative that the duties should be slashed by 30 % and the duty drawback be also jacked up to 20 %. It is the opinion of the Bureau that the textile package announced with fanfare last year had not spurred up the exports and thus this pathetic mess. It also added that the reduction in yarn duty would also compel the local yarn producers to lower their prices which EPB pragmatically termed as "monopolistic".

On April 23, 1996, the Chairman of the Filament Yarn Manufacturers Association addressed a press conference and vociferously opposed the reported enhancement in the import duties on polyester chips and resins which are the prime raw materials for manufacturing filament yarn. He further added that the 20 FYMA members have a designed capacity of 95,000 tonnes of filament yarn and that the production is about 70,000 tonnes which meets the total requirement of the domestic art silk industry. He also added that the filament yarn is also being exported and that there will be an upsurge in exports once the government fixes a realistic duty drawback rebate. (In fact, just a few days ago, the government did come out with SRO (I) / 96, which took care of the demand made by FYMA by enhancing the refund of customs duties and sales tax on importation of raw material for filament yarn). He also lambasted the continued imposition of Rs 2.50 / kg Central Excise Duty which was in addition to the 15 % Sales Tax.

What is commendable in the statement of the FYMA Chairman is that this is for the first time the Association has not opposed the expected reduction in import duties on finished yarn. The change in the posture of FYMA is laudable and it displays FYMA’s deference to the provisions of WTO and also to the ground reality. Thus there is this positive affinity between the proposal of EPB and the change in attitude of FYMA.

The more disconcerting aspect of FYMA’s press conference was the threat of all 20 FYMA members to "pull down their shutters" if the government goes ahead and increases duty on raw material for filament yarn. This is a hostile move and does not adhere to the actual situation at present. The casual threats may lead to total chaos in the weaving sector because they are predominantly dependent on FYMA’s production. The Chairman, on the one hand maintains that FYMA meets the total domestic requirements, but at the same time, he wails over the fact that the members have lost over 50 % of their capital due to continuos losses during the last two years.

This is a contradiction of the actual position. The bare facts are somewhat different. In January 1994, the Indus Polyester Ltd, in its shares prospectus, had stated that the local filament yarn production for 1992-93 was 47844 tonnes. (These were FYMA figures). FYMA’s contention that its members not only meet the total domestic requirement but are also exporting either negates its own figures or there has been an exceptional increase of over 100 % in the production capacity in less then two years.

If the latest figures are to be taken as actual, then it just proves that this is a tremendous money-making industry and thus is surely playing comfortably under the umbrella of duty protection. Moreover, if the filament yarn industry is meeting the total requirements as well as exporting, then where is the annual imports of over 10,000 tonnes of yarn going ? Even FYMA has , in one of its reports, contended that in 1992-93 over 12,000 tonnes was imported. These official figures, of course, do not take into account the huge amount of smuggled yarn.

Furthermore, the truth of the matter is that yarn prices in the local market have not decreased. A simple survey will determine that there has been no marked effect on the yarn prices because of the influence of the oligarchic status of the 20 local producers. The truth of the matter is that a very large majority of yarn consumers are small weaving mills who buy yarn on a day-to-day basis and are thus entirely dependent on the local yarn producers. They are coerced by the big-time market players to pay either in advance or COD. Even today, they suffer the ignominies of being small entrepreneurs and consider it a personal feat whenever they get the Delivery Order from the yarn manufacturers. The truth of the matter is that the small weavers are never sure what will be the price of yarn on a particular day because prices rise on the whims and desires of the yarn manufacturers. The truth of the matter is that the small weavers generally sell their grey fabrics at a mark-up of 25 to 50 paisas because of the heavy competition. The truth of the matter is that these weavers do not have the infra-structure nor the resources to import yarn on their own account. Thus they are susceptible to the cartel mechanism which is the hallmark of the FYMA members.

The threat by FYMA to close down the units seems to be a blatant ploy and is a cover-up to extort more concessions from the government and another method to pad up their bloated treasuries. It is also another ruse to jack-up the price of yarn under the guise of becoming unprofitable units. FYMA members have never passed on the benefits to the consumers. This crying over losses for over two years is also not maintainable. Proper management, control over excessive expenditures, and a right product mix, are some of the tools of profitability. The volatile law and order situation, the international recession, and the domestic political imbroglio, have all played havoc with the business environment all over the country.

However, this is not all that is responsible for the so-called woes of the FYMA members. Like a spendthrift second wife of a rich tycoon, shopping in Harrods, armed with a dozen credit cards, going all crazy buying what’s wanted or not, these FYMA moguls went on an expanding binge, increasing production maniacally, not worried about any future slowdown in economic activity. Thus excessive production, mainly in run-of-the-mill quality. The FYMA members should now re-channel their think tanks into coming up with exclusive and superior yarns. Unfortunately, in a seller’s market, the tendency is for the producer to become impervious and also to dictate own terms. There must be maturity in this self-centered attitude.

There is no doubt a need to streamline the duty structure. No one can deny that the duty on PTA and MEG should be zero-rated for another four years until the ICI plant at Port Qasim becomes operational. This is a huge $400 million project and will, hopefully, meet the needs of the domestic industry. The government has, it is reported, given assurances to the ICI management that it will not rationalize the duty on PTA. This should, however, come into effect only when this plant goes into commercial production. This is essential because the rule should be that no industry in Pakistan be entirely dependent on a monopolistic scenario or even an oligarchic one. In the long run this policy would surely be a recipe for doom.

The government has also increased the regulatory duty on imported staple fiber by 20% recently. This is a highly ill-considered move and will have severe repercussions. The present cotton scenario has compelled the spinners to go for polyester-viscose and polyester-cotton yarn. At present, nearly 20% of all yarn production consists of blended yarn. This translates to nearly 300 million kgs. This is a pragmatic approach by APTMA members and should be officially encouraged.

At the same time, the proposal of EPB that import duty on yarn be reduced carries a lot of merit. The case for a substantial rationalization of import duty on yarn can be enumerated as follows:

Primarily, the most valid point is the importance of the man-made yarn users. There is a significant proliferation of small weaving units in Karachi, Faisalabad, Gujranwala, and Jalalpur Jatan. The configuration of these units ranges from old Hoku-Riku type power looms to cop change automatic looms, and from reconditioned shuttleless machines to state-of-the-art air / jet weaving machines. These units cater not only to the domestic market but are also the suppliers to the synthetic fabrics exporters. The weaving industry is largely distributed in three sectors :

Integrated Textile Mills:

These are composite units with spinning and weaving operations in one plant. There are 53 such units having over 14,000 looms of which less than 50% are working.

Shuttleless Weaving Units:

These units contain both reconditioned as well as new weaving machines known as ‘rapier’, ‘projectile’, and ‘air-jet’. There are over 14,000 such weaving machines in operation in Pakistan. ( 1 shuttleless = 7 power looms ).

Power Loom Sector:

This sector is both in the organized as well as the unorganized sector. There are over 30,000 units having more than 200,000 power looms. About 150,000 are in operation as per the latest surveys conducted by competent organizations. These units are generally producing low value-added grey cloth and lack technological advantages in personnel, equipment, and know-how. These units also face financing problems and are thus heavily dependent on the market forces for their existence.

These units are very labor intensive and are the source of direct and indirect employment for millions. These range from skilled weavers to unskilled auxiliary personnel. The units also provide job opportunities to warpers, menders, knotters, and jobbers directly while in an indirect way the workshops, transporters, and other technical help are dependent on them.

Moreover, the units cater to the requirements of the formidable textile processing industry of the country. From bleaching to dyeing to printing, the small weavers are the source of fabrics, estimated to be nearly 3500 million square meters per year. The break-up of fabrics production is that 34% is directly exported, 35% is exported as garments and made-ups, while 31% is locally consumed. Today, Pakistan has earned a fairly good name for excellence in dyed and printed synthetic fabrics.

There is an unabashed influx of smuggled fabrics into the country. This is a highly organized racket and it ostensibly involves bigwigs who are immune from the tentacles of law, it so seems. The fabric is brought in from Dubai, Bangkok, and to some extent even from India. The modus operandi revolves from the traditional Khepia to the misuse of the Dry Port facilities, and from sea vessels berthing in the darkness of the night to fully loaded containers blatantly cleared without duties. It is open season and there seems to be an ever-increasing inflow.

The domestic filament yarn producers have been targeting just the basic yarn users. There is very little effort in introducing and producing value added yarn which could make an appreciable impact not only locally but in the world market. The FYMA oligarchy has been the beneficiary of tax holidays, monopolistic business environment, low overheads, and duty protection, which enabled them to make billions in windfall profits thus giving them the leverage to increase production facilities four or five fold in a short period. This is a text-book example of a rapid Lilliputian-to-Goliath syndrome.

The volatile cotton situation has also necessitated the increased dependence on man-made fabrics. APTMA has also been clamoring for a reduction in duty on staple fiber with the view that this will encourage the conversion by spinners from a cotton base to a substantial increase in spinning synthetic yarn, both for the domestic market as well as for some penetration in the international sectors.

Therefore, if the above factors are weighed sincerely, there is this conclusion that the domestic weaving industry is a vital segment of the industrial mosaic of the country. The units are big employment providers not only in their own premises but also to external workers too. The 600 plus textile processors pay over 800 million rupees just in fixed sales tax. This shows the magnitude of the processors relevance to the Treasury. Naturally, since they are being supplied fabrics by these small weavers, the latter are indirectly responsible for this huge tax revenue. The scourge of smuggling is a big blotch on the nation’s economy and has been the cause of closure of many industries. The domestic weavers are fighting this uphill battle against the smuggled fabrics, whether these fabrics are ladies material, men’s shirting, or whether they are for dress suits and jackets. The smuggling regime has ballooned inspite of the government’s hasty decision to allow imported fabrics at a ridiculously low import duty of only 35 %.

Moreover, a perusal of the present front loading on imported yarn is an eye-opener :

C&F price : 100.00

Import duty (35%) : 35.00

Regulatory duty (10%) : 10.00

Flood Relief Surcharge (01%) : 01.00

Sub Total [1] : 146.00

Sales tax (15%) on [1] : 21.90

Sub total [2] : 167.90

Income tax (04%) on [2] : 6.70

Sub total [3] : 174.60

Octroi (02%) on [3] : 3.50

Sub total [4] : 178.10

L/C charges, insurance, misc. (05%) on C&F: 5.00

Round off : 0.90

Grand total : 184.00

The above figures portray a back-breaking front loading of 84% which leads to making the yarn expensive. This is a big deterrent in the export of fabrics because Pakistany exporters are shown the exit door if they try to sell their synthetic fabrics in the global market at their present true cost. No wonder the exporters from India, Indonesia, Taiwan et al have nibbled away the share enjoyed by the Pakistanys. The export figures are proof positive that the decision to reduce import duty must be taken in the larger interest of the nation.