- Structural issues, input costs, and taxes continue to weigh on LSM sector growth
Presently, the Government of Pakistan mentioned in the economic report that the trajectory of LSM (Large scale manufacturing) during July-March FY2025 stayed subdued, with a contraction of 1.47 percent as compared to a contraction of 0.22 percent in the same period last year. Despite visible signs of stabilization in major macroeconomic indicators, the recovery in industrial output has been uneven and slower than anticipated.
LSM trend reflects persistent structural and cost-side issues that continue to weigh on LSM. High input costs, and elevated tax rates, continued to pose headwinds to LSM growth. At the same time, supportive initiatives were introduced on both the monetary and fiscal fronts, most notably, a cumulative reduction of 850 basis points in the policy rate by the State Bank of Pakistan (SBP) during July-March, and a targeted winter electricity tariff relief package by the government of Pakistan, to ease financial constraints and reduce energy costs for industrial units. While these interventions helped improve business confidence and liquidity in selected sectors, their full impact on production activity is still unfolding. Nearly half of the LSM basket (48.8 percent weight of QIM) registered positive growth during the period, reflecting resilience in industries like textiles, automobiles, wearing apparel, tobacco, and transport equipment. However, the overall index growth remained negative because of pronounced output declines in sectors. Localized disruptions, like law and order concerns in parts of Khyber Pakhtunkhwa, led to temporary closures of some production units, though their overall impact remained marginal.
It is said that the disparity between financial relief initiatives and real sector recovery suggests a time lag in the transmission of macroeconomic policy to production outcomes. With improving credit availability, declining inflation, and enhanced investor sentiment, the outlook for LSM recovery remains cautiously optimistic provided that stability is sustained and structural bottlenecks continue to be addressed. On a year-on-year (YoY) basis, statistics show LSM’s growth was 1.8 percent in March 2025, as compared to a growth of 1.7 percent in the same month last year. Meanwhile, on a month-on-month (MoM) basis, LSM declined by 4.6 percent in March 2025, compared to 5.6 percent decline in February 2025.
Out of 22 industrial groups, 12 registered positive growth during July–March FY 2025, showing a modest recovery in selected segments of the manufacturing sector. The output of the food group recorded a moderate contraction of 0.5 percent during July-March FY 2025 against the growth of 1.8 percent last year. Notable declines were recorded in sugar, bakery products, and chocolate & sugar confectionery (7.1 percent), tea blended (3.7 percent), and vegetable ghee (2.0 percent). In contrast, wheat and rice milling increased by 6.4 percent, and starch and its products rose by 0.4 percent, supported by better crop harvests. The fall in sugar production was primarily attributed to the deregulation of the Minimum Indicative Price of sugarcane by provincial governments, which created uncertainty for farmers. This was compounded by adverse environmental conditions, pest attacks, and low sucrose content, all of which significantly affected crop yields and sugar recovery rates.
Moreover, imposing a Federal Excise Duty (FED) of Rs 15 per kg at the beginning of FY 2025 further escalated production costs, adding pressure to an already struggling sugar industry. The textile sector witnessed a growth of 2.2 percent during July-March FY 2025, compared to a contraction of 8.8 percent in the same period last year. Growth in cotton yarn (8.4 percent), cotton cloth (0.8 percent), and terry towels & bathrobes (4.0 percent) were key contributors. This turnaround was supported by improved macroeconomic conditions and a shift in the policy rate, which lowered borrowing costs and encouraged investment. Furthermore, political unrest and labour disputes in Bangladesh between December 2024 and March 2025 led to the redirection of some export orders to textile producers in other Asian countries, including Pakistan. Although domestic cotton production declined during FY 2025, rising imports of raw cotton bridged the supply gap, ensuring continuity in production.
Additionally, increased imports of textile machinery and higher working capital borrowing signal the industry’s intent to expand and modernize operations, reinforcing positive growth momentum for the coming months. However, challenges persist in jute and woolen-related products, with output of jute goods and woolen & worsted cloth falling sharply by 25.1 percent and 24.9 percent, respectively. The woolen industry remains constrained by the poor quality of domestic wool, while the jute sector continues to face operational inefficiencies. The wearing apparel sector sustained its growth momentum, recording a 7.6 percent increase during July-March FY 2025, up from 5.4 percent in the same period last year.
The continued expansion reflects the strengthening position of the readymade garment industry, driven by improved competitiveness and rising demand in both domestic and international markets. This is further evidenced by a 7.8 percent increase in export volumes and a notable 19.1 percent rise in export values. Coke and Petroleum products posted a growth of 4.5 percent in July-March FY 2024, slightly lower than 4.8 percent last year. The main contributors to this performance were high weighted products such as high-speed diesel (9.3 percent), motor spirit (2.0 percent), furnace oil (2.7 percent), and solvent naphtha (14.6 percent), reflecting increased demand from the transport, industrial, and power generation sectors. Additionally, low-weighted products like jet batching oil and kerosene oil, which grew by 43.4 percent and 33.1 percent, respectively, also contributed to the overall growth.