Evaluating Industrial Subsidy Mechanism in the Textile Sector of Pakistan
Author: Talha Ghafoor


As an industrial policy instrument, dispensation and allocation of subsidy is a part of the core business of governments. It is widely believed that government should intervene and provide those goods and services which are important to society in case market fails to deliver. Industrial subsidies are provided to achieve some economic objectives such as promoting market competition and economic growth, promoting exports, protecting or increasing employment, encouraging investment, and enhancing access to basic infrastructures. The objective of this study is to evaluate the existing mechanism used to determine the subsidies in the textile sector as well as to investigate the impact of subsidies on the growth of textile exports. The study has utilized time series data from 1990 to 2020 to explore the effect of subsidies in promoting textile exports using Autoregressive Distributed Lag Model (ARDL) Bounds Testing Procedure. In this study textile subsidies are sub-divided into fiscal incentive and financial incentive. The results of the empirical investigation reveal that financial incentive has a statistically significant positive impact on the growth of textile exports in the long run while fiscal incentive has no impact in promoting textile exports either in the short run or long run. Furthermore, the study has qualitatively evaluated the process and mechanism through which subsidies are determined in the textile sector with the help of in-depth interviews from relevant stakeholders. The study has found no proper criteria for subsidy determination and allocation in the textile sector. Besides, public-private coordination exists in determining subsidies, while government has now formed Sectoral Councils to ensure participation of private sector in the implementation process. Post subsidy evaluation has been currently initiated by the Textile Division which is a positive step towards improving the effectiveness of subsidy schemes. The study recommends a mechanism for determining subsidies based on promoting new activities which could have the potential to create spillover and demonstration effects. Based on study results, it is proposed that financial incentive should be made more attractive by decreasing rate of return on refinance from 7% to 5% per annum for long term financing and fiscal incentive should be further evaluated in order to be improved or replaced by alternative policy instruments.

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Keywords : ARDL Model, Industrial Policy, Subsidy, Textile Exports
Supervisor: Nasir Iqbal

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