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The Rupp Report: Incentives For The Pakistani Textile Industry

Jürg Rupp, Executive Editor

The whole Asia-Pacific Rim is under economic pressure. Most of the countries are suffering a heavy downturn in their industries in general, and in the textile industry in particular. This is also the case for Pakistan, one of the giants (not only) in home textiles production.

According to official sources, the Pakistani government is not very happy with the performance of its textile industry. That’s why the so-called Economy Monitoring Committee (EMC) is considering supporting the suffering textile industry with a package, which should be discussed later this week.

However, another committee, the Economic Coordination Committee (ECC) was faster than the EMC, raising the issue in the cabinet. The majority of the ECC members have the impression that the rupee had devalued by 22 percent in one year’s time, and the ultimate advantage of this had gone to the exporters. That’s why they are asking for a special package, some sources mentioned. The major reason for this action was that the All Pakistan Textile Mills Association (APTMA) had the idea that the government “should do something” that they think is reasonable for the troubled textile industry.

Consequently, the ECC articulated its displeasure over the performance of the textile sector but also decided that any action concerning the textile industry should be discussed by the EMC first. It was mentioned that the EMC would submit its suggestions to the ECC in its next meeting. The proposal, if approved, would be a complete negation of the budgetary proposals for the period 2008-09 to extend zero subsidies for research and development support to the textile sector. The budget for 2007-08 had envisaged zero subsidies on R&D. However, some interested groups successfully lobbied the previous government to extend 19 billion rupees for the purpose.

New Incentives Package

In the new incentives package, the ministry proposed that duty drawback may be granted to the industry on domestically acquired inputs including taxes on energy — that is, gas and electricity. The drawbacks would only be allowed to those products that do not require further value addition. The drawback on locally acquired inputs would not affect the eligibility of the exporters to claim the normal duty drawback. According to the ministry, the drawbacks would be allowed to manufacturers and exporters having in-house facilities at least for cutting and stitching, and will cover shipments made with effect from July 1, 2008, to June 2009. The ministry has proposed that 30 billion rupees may be allocated to cover R&D expenditures during the financial year 2008-09.

Another proposal from the ministry was that this drawback scheme for locally acquired inputs may graduate into an investment support fund. This initiative would facilitate balancing of the value chain in the textile and apparel industry, upgrade technology, bring the unorganized sector into the organized sector, generate employment and create economies of scale.

Investment Promotion Fund

The investment promotion fund would reimburse 5 percent interest on investments in machinery to the targeted textile and apparel sectors and cover imports effected through letters of credit to be established from July 1, 2008. The fund would be operational for five years and would be reviewed thereafter. The ministry has suggested that the scheme may also be announced, with the name of the drawback scheme, to encourage investments that would not have financial implications in 2008-09. However, any claims may be covered from the amount allocated in the budget.

Tax Credit Facility

Another important proposed incentive is said to be a 20-percent tax credit facility on investment under the drawback scheme. Furthermore, it was also proposed that reimbursement of interest on loans to the textile industry for 2007-08 may continue for another year at the rate of 5 percent. It was also mentioned that the textile industry has also required separate power tariff for it, but it is unlikely to be approved by the government.

September 3, 2008