A budget for restrained growth

According to this year’s Budget, GDP growth for 2014-15 stood at 4.24% – the highest since 2007-08, although trailing well below South Asia’s growth as a region. Furthermore, given that interest rates are at their lowest in 42 years and inflation is under control, one would have expected significant economic growth, yet the projection for GDP growth in 2015-16 is limited to 5.5%, possibly because structural impediments, such as energy shortages and security concerns continue to adversely affect the economy.

Looking at the Budget from the perspective of the advertising industry, it is clear that the impact will come from macroeconomic factors, coupled with direct and indirect tax changes. Short term macroeconomic indicators (lower cost of borrowing, moderate inflation and per capita income growth) should spearhead consumer spending. Studies have shown the positive correlation between consumer spending and advertising, if only because companies want to benefit from the increased spending associated with a growing economy and will therefore advertise to attract new customers. However, increased consumer spending also requires investment in capacity and the question is whether companies in Pakistan are ready to do this?

The dilemma for entrepreneurs is whether it is worth their while to set up new industries and then deal with the hassles of extortion, taxation, corruption, weak infrastructure and so on, when they can get a return of 20% or more simply by investing in stocks or property. There are entrepreneurs who are investing in growth, but they are doing so in significantly lesser proportions than what they are capable of. Clearly, building both business and consumer confidence is going to be as important as any change in policy.

In the meantime, until such obstacles to investment are reduced, economic growth will depend on government spending on infrastructure projects such as the Chinese Pakistan Economic Corridor (CPEC). Although these projects tend to increase government debt, they are needed in order to support long-term growth. However, to really reap their benefits, the government must fix inbuilt inefficiencies within the system which result in economic leakages, otherwise Pakistan will be trapped by an unsustainable level of debt with insufficient means of servicing it.

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