comments on draft industrial policy by nK824Q

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									                 Comments on the draft Industrial Policy 2010

The draft Bangladesh Industrial Policy 2010 (IP-2010), announced by government last month,
came in for discussion in a seminar organized by the Islamic Economics Research Bureau on
Friday the 22nd October 2010. Professor Ayubur Rahman Bhuyan presented the main paper in
the seminar.
The declared objectives, goals and strategy of the policy were generally appreciated in the
seminar. Particularly acclaimed in the seminar are the following policy provisions:
      The new policy proposes an integrated strategy for achieving high economic growth
       through rapid industrialization.
      The policy has been prepared taking into consideration the government’s determination
       to achieve the MDGs by 2015, and halve the number of the unemployed and hunger- and
       poverty-stricken people by 2017.
      It envisages rapid industrialization through short-, medium-, and long-term measures,
       aiming to raise the rate of GDP growth to 8 percent by 2013, and 10 percent in 2017 and
       thereafter till 2021 when Bangladesh expects to achieve the status of a middle-income
       developing country.
      The proposed industrial policy envisages an increase in the industry sector’s share in
       GDP to 40 percent by 2021 from the present 28 percent, and the proportion of the
       employed workforce to 25 percent by that period from 16 percent now.
      It encourages the growth of SMEs in rural areas to reduce the pressure of migration to
       urban areas.
      The policy puts emphasis on the establishment and balanced development of industries in
       different geographical regions of the country.
      It will encourage the establishment of separate economic zones for sectors such as
       textiles, ceramics and pharmaceutical ingredients.
      The policy regards a vibrant and dynamic private sector as the key to the country’s rapid
       industrial growth, and hence the growth and expansion of the private sector will be the
       main objective of government policy.
      Public investment will be limited to sectors that are considered crucial and sensitive to
       national security and in areas that will have a crowding-in effect on private investment.
       Government will only play the role of a facilitator.
      Public Private Partnership (PPP) shall be an important element in the proposed industrial
       policy.




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      Agro-based, food processing, and labour-intensive industries will receive priorities in
       matters of getting fiscal and other incentives.
      The policy will provide necessary protection to local industries from unfair competition
       from dumped or smuggled imports.
      The policy formulates measures to tackle problems of sick industries and devises an exit
       policy for industries that have remained sick for 15 years.
      Sick industries, if found potentially viable by appropriate studies, may be converted into
       public limited companies to make them efficient, competitive, and profitable.
      It seeks to make the industrial sector environment-friendly and encourage industrial
       enterprises to adopt pollution control measures.
      It will adopt appropriate reforms and take measures to make the jute sector industries
       profitable and diversify the uses of jute.
      There is a plethora of tax incentives in the proposed policy, viz., tax exemption, tax
       holiday, accelerated depreciation allowances, tax policy benefits, incentives for NRBs,
       equal treatment for local and foreign investors etc.
      The seminar appreciates that the 2010 Policy has brought an improvement over the 2005
       policy by changing the classification of Industry and giving a new definition of industry
       size. Thus,
       –   The 2010 policy has recognized micro and high-tech industries as separate categories
           of industry. The reclassification will enable micro and high-tech industries avail of
           the facilities catering for their special needs and problems.
       –   The redefinition of industry size in terms of both capital and employment of labour
           has been a prudent decision.


As against the pogitive policy provisions, the seminar has expressed reservations in the following
matters:
      The rationale behind the long lists of thrust and service sector industries is difficult to
       understand.
      The lists of thrust and service sector industries, of course, include some industries with
       high potential, but there are others, which do not produce standardized products, require
       only small amounts of capital, and have very small markets for their products.
      The long lists of Thrust and Service industries may in fact detract attention from the
       relatively more important ones that genuinely need significant fiscal, financial and
       infrastructural support.




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   Therefore, limiting the number of the industries in the respective lists to accommodate
    the most important ones would be more realistic and meaningful.
   The seminar also criticizes the inclusion of a large number of industries (17 in all) in the
    list of Regulated Industries, because the restrictive condition of registration of these
    industries could hinder private sector initiative. The list may therefore be shortened and
    contain fewer industries.
   The proposed industrial policy suffers from a contradiction. On the one hand, it
    recognizes the role of a vibrant private sector in industrial growth, but on the other hand
    it plans to go ahead with SOEs and calls for raising their profitability.
   It is common knowledge that a market economy cannot thrive if there is a large presence
    of SOEs.
   Given the continuing operating losses of SOEs, discarding the principle of divesting the
    loss-making SOEs just for purpose of protecting jobs is fraught with the danger of
    increasing the number of sick industries.
   A proper solution of the problem of the ailing SOEs is their outright privatization.
   The emphasis on PPP in the proposed industrial policy is laudable but the concept is still
    in a rudimentary stage. Expeditious action will need to be taken by government to devise
    a transparent mechanism and frame well-defined rules for participating in and mobilizing
    funds for the PPP projects.
   The continuation of the prevailing tax holiday facility proposed in the Policy is welcome.
    However, the tax holiday facility should not be limited for only a given time period but
    extended for further periods on case-by-case basis. Area wise exemption facilities
    enjoyed by industrial establishments could also be made more liberal and extended for
    longer time periods, say 7 years in developed regions and 9 years in less developed
    regions.
   The seminar, however, suggests that, for purpose of giving tax holiday facility, industries
    should be chosen based on sound economic criteria.
   Keeping in view the need of the local industries to remain competitive, the seminar
    considers it necessary to reduce the customs duty rates on machinery and spare parts,
    basic raw materials, and intermediate products from the prevailing 2.5%, 5%, and 10%,
    to 0.5%, 2.5%, and 5%, respectively.
   Moreover, there should not be any VAT or any other duty on the import of machinery
    and spare parts and basic raw materials. A reasonable rate of customs duty may, however,
    be imposed on intermediate products that have domestic production.




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The seminar also draws the attention of the policy framers to the following observations:
   1. All successive governments in the country since independence announced policies and
      strategies for accelerating the process of economic growth through the development of
      the industrial sector, but the growth of the industrial sector remained slow due to factors
      like energy shortage, poor inflow of foreign direct investment (FDI), labor unrest, and
      poor law and order conditions, and inconsistent policies, which vitiated the overall
      business environment, discouraged investors, and hindered industrial activity in the
      country.
   2. The seminar suggests that in order to pave the way for strong growth and expansion of
      the industrial sector, the industrial policy should contain appropriate measures to address
      these problems.
   3. The seminar puts strong emphasis especially on the maintenance of internal law and
      order and political harmony without which the industry sector cannot be expected to
      thrive.
   4. The problems of energy and gas sectors will need to be addressed with all seriousness.
   5. Past industrial policies failed because they scarcely addressed the hard-core problems that
      hindered industrial activity, thus making the policy incentives meaningless. There was
      virtually no recognition in the policies of the supply-side constraints, both structural and
      policy-induced, that were the major impediments to the expansion of private sector
      manufacturing industries.
   6. The presence of structural and policy-induced constraints also explains why foreign
      investors are not willing to invest in this country despite the availability of attractive
      incentives. Foreign investors want a congenial, secure, business environment, not just
      incentives.
   7. The seminar suggests that apart from addressing the broader issues centering structural
      and policy-related constraints, the proposed industrial policy should also address the
      sector-specific problems faced by different industries. While the most common problems
      faced by all industries are those of infrastructure, capital and technology, some of the
      problems are specific to particular industries.
   8. According to seminar participants, industrial policy should not consider FDI merely a
      means of complementing domestic resources for industrialization. It should also ensure
      that foreign investors bring in new technology. A strict screening of FDI would therefore
      be necessary. To that end, the proposed industrial policy should clearly lay down that
      foreign investors would not be accorded permission to invest in this country unless they
      brought the latest technology.




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9. The seminar welcomes the policy emphasis on environmental protection but asks the
   government to adopt appropriate measures that will make the private sector enterprises’
   tasks easier to take effective steps against environmental pollution and desist from such
   activities as may cause such pollution.
10. A pre-requisite for industrial development in the sustained growth of the agriculture
    sector, which supplies the essential raw materials to the industrial sector. Hence,
    government must play a stray supportive role in agriculture sector development.
11. A competition law should be enacted in order to prevent restrictive business practices and
    encourage competition in the industrial sector. Lessons may be drawn from the prevailing
    competition laws of some neighboring countries.
12. The seminar observes that industrial policy implementation in Bangladesh remained
    weak in the past because of inherent bureaucratic complexities, red tape, and delays in
    decision-making. These problems will need to be addressed seriously.
13. Seminar participants are optimistic of the success of the 2010 policy and believe that if
    the state machinery were able to improve the quality of governance, Bangladesh could
    achieve a double-digit industrial growth in the coming years and move closer to
    achieving the target of raising the industry sector’s share in GDP to 35-40% in the next
    decade as set by the 2010 industrial policy.




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