After posting a 10-year high growth of 5.7pc last year, large -scale manufacturing (LSM) has taken an even better start in the first two months of this fiscal year.

In July-Aug, this year, annualised increase in LSM output shot up to 11.3pc, according to the Pakistan Bureau of Statistics.

And, whereas LSM growth in the last fiscal was primarily driven by domestic demand, this year’s growth impetus is likely to also come from export-led requirements.

Exports have begun to grow. In July-September FY18, exports rose around 10.84pc over the same period of FY17. So, export-led demand is there. And, officials say it is going to increase, infusing more life in LSM segments like coke and petroleum, pharmaceuticals, chemicals, leather and engineering products etc.

But this optimism is conditional: that no political turmoil erupts; law and order situation does not deteriorate, gas and electricity supply to the industry remains satisfactory and low-cost, big bank loans continue to flow freely.

Local demand is robust. Prospects of export-led demand have brightened. Industries have also invested in capacity building. Meeting LSM growth target of 6.3pc for FY18 looks quite possible, more so because ongoing CPEC-related projects and higher FDI inflows will have a positive impact on LSM, according to a SBP assessment revealed in its FY17 annual report.

In the last fiscal year, LSM growth came on the heels of higher public sector spending on construction and infrastructure, improved security situation, generous bank lending to private sector at low interest rates, better access of industries to gas and electricity supplies and a 3.5pc expansion in agriculture output.

Generally speaking, companies also saw their profits growing which led to capacity enhancement in some sectors and higher economic growth translated into increased purchasing capacity of consumers.

Whereas LSM growth in the last fiscal was primarily driven by domestic demand, this year’s growth impetus is likely to also come from export-led requirements

Almost all these supporting factors are still present in this fiscal year. And, additionally exports, too, are moving northwards. Small wonder then, that LSM has posted a big 11.3pc rise in first two months of this fiscal year.

In FY17 LSM growth was broad-based. Twelve out of total 15 broad categories of it industries had recorded higher outputs. Only three had shown a declining trend. This trend seems to be consolidating as in the first two months of this fiscal year, only one segment of LSM i.e. fertiliser has recorded a fall in output. All others have shown a rising trend in output.

Industrialists say this year, expansion in LSM output can be driven more by textiles than in the last year. This can have a key impact on overall LSM growth as textiles account for about 21pc of LSM-100 index. In FY17 textile exports remained literally stagnant at $12.452 billion (against FY16’s $12.447bn).

But in the first quarter of FY18, textile exports have grown about eight per cent to $3.257bn. One element of this increase is raw cotton exports and the other is larger shipments of a variety of textile products, trade data reveals. Both increased activity of ginning mills and larger output of textile manufacturing is accounted for in LSM growth.

Food, beverages and tobacco, too, is expected to grow further this year after posting a double-digit growth last year. The reason is sugar production that drove up this segment’s growth in FY17 is expected to remain strong in FY18 as well; wheat output is projected to remain high and even if water woes take their toll, there is a huge carryover stock of 5.7 million tonnes; rice and maize crops are also likely to remain as strong as in FY17.

Besides, retail and wholesale food business is growing, providing the required support to food and beverages industry. This segment has the second highest weight of about 12.4pc in LSM and if it continues expanding output like the previous year, overall LSM growth should remain stable.

This looks more likely also because output of the vegetable ghee and cooking oil industry that remained sluggish in FY17 has entered FY18 aggressively. In August 2018, output of ghee and cooking oil surged 5.5pc and 9.4pc respectively over August 2017, latest stats reveal.

All other segments of LSM each carrying 3-5pc weight in LSM 100 index continue to enjoy rising demand. These are coke and petroleum products, pharmaceuticals, non-metallic mineral products (mainly cement), automobiles and iron and steel products etc. In fact, the first two of these segments are already enjoying export-led demand as well. And, for the remaining three, domestic demand is strong enough to compel them to move their wheels of production faster.

Ongoing construction of physical infrastructure (both under CPEC and otherwise) and progressing huge housing schemes are, and will remain, main

users of cement and iron and steel products. E-hailing cab services Uber and Careem have opened floodgates of demand for locally assembled cars and agricultural growth is sure to boost demand for fertilisers.

On the other hand, private sector lending of commercial banks is still heavily centered on the corporate sector and banks are increasingly making larger loans to companies at low interest rates, thanks to an overstretched lax monetary policy.

However one big thing, apart from any political upheaval ahead of next election due in mid-2018, can negatively impact on LSM growth.

Whereas the recent imposition of regulatory duty on 731 can help some industries like automobiles do better than before, “the addition of certain raw materials in the list (of the items 731 items) will increase the manufacturing cost (for other industries),” warns Shakil Dhingrah, chairman of a standing committee of the Federation of Pakistan Chambers of Commerce and Industry.

Published in Dawn, The Business and Finance Weekly, November 6th, 2017