WHITHER PAKISTAN? - Pakistanâ€™s worsening economic state would also affect India Writing on the wall: Ashok V. Desai The State Bank of Pakistan has been busy denying rumours that its copper and aluminium coins contain gold. Apparently, some clever businessmen have been telling Pakistanis that their copper and aluminium coins are worth much more because the SBP has put gold in them, and that once enough people find this out and install hearths in their houses to melt the coins, they will disappear from circulation. It is honourable of the bank to deny the rumours, for they can only add to its profits. If people melt coins, there will be a shortage of them; the SBP can then issue more of them. Since they are only made of base metals, they are worth far more than the metal they embody, and the SBP makes a profit on them. It has forgone the profits. But the same crooks manufacture Indian coins and live in luxury on the profits. The Reserve Bank of India could not care less. The coins add one or two per cent to the normal Indian inflation rate of 10 per cent a year; we Indians can take that in our stride. When the SBP is not kept busy by smugglers and forgers, it watches the economy and tries to keep it on the rails. Its most interesting publication is the annual report, to which it has now added quarterly surveys of the economy. According to the latest annual report, Pakistanâ€™s gross domestic product grew 2.4 per cent in 2010-11. It will be recalled that the Indus floods of July 2010 devastated a fifth of Pakistan, and affected 20 million people. According to the SBP, this was especially hard on rich landlords; while aid poured in from abroad, the rich were too proud to go and stand in a queue for foodgrains or fertilizers. Most of the growth was in services, whose output grew 4.1 per cent; the highest growth â€” 13 per cent â€” was achieved amongst services by the government. The war on terror and a 50 per cent salary increase for government servants were major factors in its high growth. The SBP makes an interesting comparison between the Indian and the Pakistani railways. The Indian Railways has one worker per 5000 passengers; Pakistani railways have one per 1000 passengers. As a result, the Indian Railways spends less than 60 per cent of revenue on wages, against over 80 per cent for Pakistani railways. (Although the SBP does not draw the inference, an average Indian worker is paid immensely more than a Pakistani worker.) The Indian Railways subsidizes passengers from freight earnings; Pakistani railways do it on a much larger scale. Mamata Banerjee had better take note. Although she has tried her best to ruin the Indian Railways, she has much catching up to do before she can compete with her Pakistani counterpart. Industrial production fell slightly; the fall was due entirely to electricity production, which fell 21 per cent. Capacity utilization figures for Pakistanâ€™s industry are astonishing: more than half the capacity was unused in 2010-11 â€” 24 per cent in cement, 45 per cent in sugar, 51 per cent in cars, 60 per cent in steel, 65 per cent in refrigerators, 82 per cent in flour mills, and 90 per cent in commercial vehicles. If Pakistani manufacturers can survive with so much surplus capacity, their profit margins must be really big. They are not the only ones who do well; so do smugglers of tea and cigarettes. These are good products to smuggle into Pakistan. Meanwhile, industrial production continued to be constrained by lack of power. The origin of this shortage is interesting. It is not because power companies cannot supply the power. It is because of the way price control on electricity works. To be effective, price increases have to be approved first by the National Electric Power Regulatory Authority, and on its recommendation, by the federal government. The government is extremely reluctant to raise prices because it is ultimately responsible for financing the losses and does not want to do so; so power producers run out of cash and stop producing. The government is one of the biggest defaulters on payment. When there is no cash, power production stops. The average urban load shedding is 4-6 hours; in April 2011 it went up to 10 hours. In villages it was considerably more. Power production is a marginal industry in Pakistan â€” much more so than in India........ A significant proportion of it went to power generation and distribution companies; in the present circumstances, it is money down the drain. Much of the remaining finance to the private sector goes to importers and exporters. What this means is that banks finance economic development much less in Pakistan than in India. Pakistanâ€™s plight looks so much like Indiaâ€™s in the 1950s and 1960s. There is also a certain similarity in the mindset. At that time, Indians thought that they were struggling against powerful foreign forces; so do Pakistanis today. The only difference is that despite its lack of friendliness with Pakistan and the West, the Indian government then spent heavily on development; Pakistan is spending very little on it today. If its government continues to be so shortsighted, Pakistanâ€™s condition may worsen further; that cannot leave India unaffected. Even those who feel unfriendly towards Pakistan need to ask whether it is not in our interest to give it a helping hand. More at: Whither Pakistan?