As Pakistan navigates a delicate economic transition, the take-off stage, the performance of its Large-Scale Manufacturing (LSM) sector stands as a barometer for industrial health and long-term economic resilience. The latest Quantum Index of Manufacturing (QIM) by the Pakistan Bureau of Statistics (PBS) for May 2025 shows a modest uptick in momentum. The index rose by 2.29% year-on-year and 7.93% month-on-month compared to April 2025, indicating short-term recovery. However, the cumulative QIM for July-May FY25 stands at 114.92, reflecting a contraction of -1.21% over the same period last year, a continued signal of underlying inefficiencies in the industrial base.
The cumulative QIM for July-May FY25 reflects a contraction of -1.21%, signaling underlying inefficiencies in the industrial base.
Delving into sectoral performance, the data paints a mixed picture. The automobile sector continued to drive the recovery, registering a 43.94% increase, followed by notable gains in coke & petroleum products (4.74%), garments (5.20%), and textiles (2.79%). However, these pockets of growth were outweighed by contractions in key intermediate and capital goods sectors. Iron and steel products declined by 9.30%, electrical equipment by 12.74%, and furniture by a staggering 58.09%, which shows structural weaknesses and capacity limitations.
Even food production, which traditionally acts as a buffer during downturns, fell by 2.32%, while chemical products recorded a 12.12% decrease. These facts point to systemic vulnerabilities in Pakistan’s industrial base, including (i) weak productivity, (ii) inconsistent energy supplies, (iii) rising input costs, and (iv) the absence of meaningful technological upgrading. Despite the resilience shown by sectors linked to consumer goods and petroleum, the decline in intermediate and capital goods industries undermines forward and backward linkages necessary for long-term industrial expansion.
Pakistan has experienced significant de-industrialization over the past several decades, with no effective policy intervention to halt or reverse this trend. Its international standing reflects this regression. According to UNIDO’s Competitive Industrial Performance (CIP) Index, Pakistan ranked 81st out of 153 countries in 2023, down from 75th in 2006. Regionally, this is the lowest ranking, with Bangladesh at 64th, India at 37th, and Vietnam at 30th.
Illustration: Author
Among the key components of the CIP index, Pakistan significantly trails its regional peers in all dimensions of industrial competitiveness. In terms of industrial export quality, Pakistan scores 45%, compared to Bangladesh’s 51%, India’s 67% and Viet Nam’s impressive 81%, reflecting a lag in value addition. The share of manufactured goods in total exports stands at 76% for Pakistan, far behind Bangladesh (98%), Viet Nam (89%) and India (88%), showing Pakistan’s greater reliance on primary or low-value exports. Manufacturing value-added as a share of GDP is also alarmingly low at 12%.
Abrupt tariff removals risk exposing vulnerable sectors to foreign competition, threatening local manufacturing and employment.
In contrast to 15% in India and 25% in both Vietnam and Bangladesh, Pakistan’s shrinking industrial footprint in the domestic economy. Finally, the share of medium-and-high-tech manufactured exports in total manufactured exports is only 11% for Pakistan, a fraction of Viet Nam’s 59% and India’s 38%, and even below Bangladesh’s 2%, stressing Pakistan’s persistent dependence on low-tech, low-value production. Together, these components show Pakistan’s industrial sector struggling to compete both regionally and globally.
This context makes the newly unveiled National Tariff Policy (NTP) 2025-30 mainly significant but potentially problematic. While the policy aims to rationalize tariffs and promote export-led growth, its hostile liberalization targets risk outpacing the preparedness of Pakistan’s domestic industry. According to the policy, the average applied tariff rate is set to decline from 10.6% in FY25 to below 6% by FY30, with ACDs eliminated in 4 years and RDs in 5 years.
Currently, 7,476 out of 7,589 tariff lines are subject to ACDs, while 1,996 lines face RDs. These duties, originally imposed to offer fiscal space and curb non-essential imports, serve as critical protection for vulnerable sectors. Industry stakeholders, particularly in the automobile sector, have cautioned that abrupt removal of these duties could expose domestic manufacturers to a wave of foreign competition, undermining the ‘Made in Pakistan’ policy and threatening local employment.
RDs, in particular, are structured to discourage non-essential imports and preserve space for local industries; removing them without transitional safeguards may lead to import surges that domestic firms are ill-equipped to withstand. This concern is substantiated by the recent QIM-sectoral stats, which show sustained contraction in key protected sectors: iron and steel declined by 9.30%, electrical equipment by 12.74%, and furniture by 58.09% during July-May FY25.
Energy affordability and reliability remain the most immediate constraints weakening industrial competitiveness.
These sectors, heavily reliant on tariff protection, reveal structural inefficiencies in productivity and competitiveness. Without a parallel industrial upgrading agenda, including energy pricing reform, concessional financing, and technological modernization, tariff liberalization risks deepening industrial fragility rather than reversing it.
Against this backdrop, the government has finalized a 10-year Industrial Policy aimed at reversing Pakistan’s prolonged industrial contraction. The policy outlines a series of interventions, including a phased reduction in corporate tax rates from 29% to 26% over three years, revival of distressed industrial units through improved credit facilitation, legal reforms to foster a more business-friendly and secure investment climate, and enhanced financial access for SMEs. Progress under the policy will be reviewed every 18 months.
However, concerns have been raised by key industry groups regarding the lack of inclusive consultation in the policy’s formulation. Despite earlier dialogues, major stakeholders contend that the final version was approved without broader industry input, raising questions about its representativeness and on-ground viability.
To truly revive LS-manufacturing, reforms must go beyond tariff alignments. The most immediate constraint remains energy affordability and reliability. High industrial electricity tariffs and frequent outages, mainly for export-oriented industries, weaken production cycles and competitiveness. Sector-specific energy subsidies, especially for industries showing potential, can generate long-term export gains.
Second, credit constraints are strangling domestic manufacturing. The LSM sector continues to be crowded out by the government’s borrowing needs. An Industrial Modernization Fund backed by concessional lending from multilateral agencies or commercial banks could facilitate access to capital for machinery upgrades, warehousing, and product diversification (R&D), mainly for SMEs.
Trade liberalization must align with sectoral readiness; one-size-fits-all tariff cuts will deepen manufacturing fragility.
Finally, a key structural flaw is the disconnect between industrial and trade policies. The NTP, in its current form, offers a one-size-fits-all tariff reduction plan. Instead, trade liberalization should be tied to sectoral readiness and competitiveness assessments. The latest industrial output trends signal fragility, not revival. Pakistan’s LSM sector may not withstand further shocks without coordinated reform. The new policy must be more than a document; it must become the architecture of industrial recovery, with the state actively enabling productivity, innovation, and competitiveness across sectors.
Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.
