Domestic demand appears to be improving, reflecting the resilience of the informal economy, but exports remain uncompetitive.
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Mohiuddin Aazim Published August 31, 2026
Labourers work at the spinning section of a textile mill in Rawalpindi.—Reuters/File
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The large-scale manufacturing (LSM) sector may finally be turning the corner. In FY26, LSM
expanded by approximately 6.5 per cent after contracting in the preceding year. The improvement was broad, though uneven: 16 out of total 22 major industrial groups recorded growth, while six contracted.
The strongest rebound came from automobiles and transport, which registered an impressive 61.6pc increase. Passenger-car production rose by more than 51pc, while truck sales jumped by 87.8pc. Electric vehicles also added to the momentum. Rubber products, benefiting from demand from auto assemblers and the local replacement market, grew by 14.3pc.
Electrical equipment expanded by 11.9pc, reflecting increased demand for construction and industrial power equipment. Tobacco production rose by 11.7pc, while coke and petroleum products advanced by 10.9pc, supported by higher domestic consumption of petrol and high-speed diesel.
Food and beverages also made a useful contribution. Food production increased by 9.8pc, led chiefly by wheat and rice milling and cooking oil, while beverages grew by 7.7pc. Non-metallic minerals advanced by 8.2pc, with cement production rising by 9.1pc as construction activity picked up.
Domestic demand appears to be improving, reflecting the resilience of the informal economy, but exports remain uncompetitive
Apparel and garments performed well, helped by a recovery in export orders. Baseline textiles, however, managed only modest growth of about 0.7pc. Furniture recorded a notable 20.5pc increase, while leather products and fabricated metal products also expanded.
Several developments provided a shot in the arm to manufacturing. Monetary easing reduced financial pressure, foreign exchange became more readily available for raw-material imports, and inflationary pressures stabilised compared with earlier fiscal years. These conditions enabled manufacturers to restore production and respond to improving domestic and external demand.
Yet the improvement remains incomplete. The six contracting groups faced high input costs, changes in raw material availability, export headwinds and domestic policy adjustments. Pharmaceuticals suffered the most notable contraction. The industry remained under pressure from the after-effects of price deregulation, regulatory friction and the high cost of imported active pharmaceutical ingredients.
Iron and steel products also recorded negative growth. Public-sector infrastructure spending had remained subdued during the earlier part of the fiscal year, while high financing and energy costs continued to weigh upon local steel re-rolling mills.
Fertiliser output fell by about 1.99pc, chiefly because of interruptions in gas feedstock supplies and seasonal variations in demand. Within automobiles, farm tractors were the sole sub-segment to decline. Production fell by about 8pc and sales by roughly 13pc, reflecting slower expansion of sectoral agricultural credit and the withdrawal or reduction of tractor subsidies in certain areas.
The textile picture was similarly divided. Finished garments benefited from recovering export orders, but basic textile industries producing cotton yarn and grey cloth remained stagnant or suffered minor contractions. High electricity tariffs and stiff regional export competition continued to hamper these industries.
The headline 6.5pc growth therefore deserves closer examination. The strong expansion in automobiles and food products, in particular, points towards an improvement in domestic demand. Passenger-car production rose by more than 51pc, truck sales by 87.8pc and food production by 9.8pc. Such movements suggest that households, businesses and other domestic consumers have regained some purchasing capacity after a prolonged period of economic weakness.
There is, however, another dimension to this revival. Stronger demand for automobiles, food, beverages and other domestically oriented products may also reveal the continuing strength of Pakistan’s informal economy. A substantial part of economic activity takes place outside the formal corporate sector and is consequently not fully captured in conventional measures of documented incomes, employment or tax collection. Rising consumption can therefore provide an indirect indication that purchasing power exists beyond what formal-sector indicators alone might suggest.
The picture looks less reassuring when one turns to several of the industries that contracted. Pharmaceuticals, chemicals, iron and steel, fertilisers and basic textiles are not merely suppliers to the domestic market. Several have an important role in supporting exports, either directly or through the wider industrial supply chain. Their declining output may therefore indicate that the expected recovery in external demand has yet to gather sufficient strength.
Domestic consumption can sustain manufacturing for a time, but a durable industrial expansion requires both domestic and export markets. If consumption-led industries grow while export-oriented or export-supporting industries remain weak, the recovery may prove narrower than the LSM headline suggests.
The latest figures thus present two contrasting signals. Domestic demand appears to be improving, partly reflecting the resilience of the informal economy, while the weakness of several export-linked industries suggests that Pakistan has yet to fully regain its competitive position in international markets.
For industry, the next phase will be a make-or-break period. If the improvement is supported by sound policies rather than short-lived measures, manufacturers may consolidate their gains. If costs, energy shortages, regulatory uncertainty and weak investment return, the revival could prove temporary. The opportunity should therefore be used while conditions are favourable, rather than allowing them to slip away.
Published in Dawn, The Business and Finance Weekly, August 31st, 2026
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