Monday, July 7, 2014

AFFECT OF REMOVAL OF COST AUDIT IN VARIOUS INDUSTRIES.

A special thanks to CMA Vijendra Sharma and CMA Amit Apte for their support and inputs on the same. Without their help I should have been able to write the same.
Till date we are asking for our rights but now the time has come to let the world know that what this profession of COST ACCOUNTING and COST AUDIT has been doing for the Indian economy. The time has come to raise the values and the benefits the COST AUDIT and COST ACCOUNTING profession provides to the Indian economy. The recent draft of the Cost Audit rules and regulations have abolished cost audit across all prime industries. I am going to explicitly cover the areas where cost audit have been abolished and its affect on the Indian economy in the coming days. There might be some business houses that might have supported abolishment but all these happened under the UPAII regime. This policy have been framed under the UPA-II regime and its clearly depicts that through this new COAST AUDIT Rules and Regulation Applicability would make Indian economy to collapse over the long term. The low cost tag line of Indian economy which is the key tool of competitiveness globally is going to be lost over the long term. It’s not about the 500000 students and 65000 members but it’s for the journey of the Indian economy from an underdeveloped to a Developed economy.

I have found that many people have said that Cost Audit practice is being done by only a small number of members but we forget that there are thousands employed as cost accountants in various industries and over the past 6 decades we have been catering to the growth path of the Indian economy.
I know that every one is busy with the Indian Budget which is going to held on 10 of July 2014 but what about the budget of 2015-16 and afterwards since after the abolishment of COST AUDIT there would be no way to measure the cost associated with any business. The adverse affect of the abolishment of COST AUDIT is going to be severe on the Indian economy in the coming days. This is act which was created deliberately by the UPAII to make the situation worse for the present government. With the new cost audit rules and regulation FDI investments would be declining and further government will be losing billions of money in the form of Indirect Taxes in the long term. When the Indian economy is planning for becoming one of the fastest economies of the world the recent abolishment of COST Audit across several industries would place significant slow down for the economy.

More RBI, World Bank, Asian Development Bank, would not be able to measure and ascertain the proper costing for all these industries and hence inflation and inflow of FDI capital would decline in the coming years. Moreover by making cost audit abolished fully or partially all these industries there are other ancillary industries linked with these who will be equally damaged in the long run. I am confident that all readers would be proud to be and become a Cost Accountant. We are building the nation over the last 5 decades.
The Industries where COST AUDIT has been abolished fully or partially are as follows:

  1.        Energy subsidy & Gas Price pooling- We all know that Indian economy goes through tough phase regarding management of energy subsidies. The fiscal deficit of the Indian government is primarily due to high energy subsidy. On the other hand cost audit have been abolished for gas price pooling where currently the current population of India is reeling under high gas prices. Recently the gas a price have been hiked and if cost audit where cost analysis and cost management is being used is abolished then in the near future there will be no process of cost estimation and gas prices would only increase to abnormal levels. So Indian economy and its population will face higher gas prices and high levels of subsidy burdens which will bring down the growth prospects of the Indian economy. By abolishing cost audit every industry there will be no proper costing methods and every business from this industry would follow different methods of costing and pricing of their products.
  2. .       Cement & Construction equipment- India needs $1 trillion of infrastructure investments. This investment is only going to come when the pricing and cost of construction is competitive enough. India's potential in infrastructure is huge. The country is expected to become the world's third largest construction market by 2025, adding 11.5 million homes a year to become a US$ 1 trillion a year market, according to a study by Global Construction Perspectives and Oxford Economics. Well for that we need cost audit and cost analysis to decide the competitiveness for bringing investments in this segment. Now after cost audit being abolished, every cement and Construction Company would follow different cost estimation and analysis techniques which will not be uniform. Price of the projects would increase and improper costing methods would lead to significant loss for the government revenue under PPP model and revenue of the Indian government through taxes would decline since everyone will hike their prices resulting less profit and less tax on these projects. Down the line these projects would become so expensive that FDI investments would decline and the quality of Infrastructure would be poor. The cement industry of India is the second largest producer in the world. The production of cement has increased at a compound annual growth rate (CAGR) of 9.7 per cent to reach 272 million tons (MT) during FY 06–13. . According to data released by the Department of Industrial Policy and Promotion (DIPP), cement and gypsum products attracted foreign direct investment (FDI) worth Rs 13,370.32 crore (US$ 2.24 billion) between April 2000 and February 2014. Now if cost audit and costing methods was not their then this industry should not have grown and should not have dreamt to grow like this. Moreover the government would find later on that imported cement is much cheaper as compared to the domestic prices and import would begin.
  3. .       Electronic products- India is now the growing hub for electronic products. FDI companies have opened up their shops of manufacturing in India since the cost of production is attractive. Now with no COST Audit for this industry would lead to no uniform method of cost estimation and prices would increase. Increased prices would lead to increase of inflation and loss for the government revenue since every industry would inflate prices and government will not be able to access the correct prices.  FDI investments would decline once the prices increases and import of foreign products would turn out to be cheap. This will increase the Fiscal deficit of the Indian government in the coming days and our domestic manufactures would be unemployed down the line next 5 years.
  4. .       Food Processing Industry - technology up gradation, modernization, establishment, Vegetables, Fruits and Nuts, Poultry and Related Products etc- Cost audit have been abolished for these industries and hence there will be no uniform costing methods for theses industries.  How RBI and the Ministry of Finance would find the prices pattern and cost pattern of these industries. More over with no cost audit being applicable for the Food Processing Industry there will be loss of government revenue since every company would discard at their own wish their plants and machineries and would establish modernization of their plans  to save taxes for several years since these cost are capitalized for several years. At the end Indian government would hardly get any revenue from these industries and even the prices of the food items etc would increase and inflation would be out of control. The food processing industry is one of the largest industries in India and is ranked fifth in terms of production, consumption, export and expected growth. The Indian food industry which presently stands at close to US$ 135 billion with a CAGR of 10 per cent is expected to touch US$ 200 billion by 2015. The food processing industry in India attracted foreign direct investments (FDI) worth US$ 5,793.95 million during the period April 2000–March 2014, according to data published by Department of Industrial Policy and Promotion (DIPP). After cost audit is being abolished how RBI will measure the real price hikes and its causes. Moreover imported plant and machinery would be used for technological up gradation which would increase the fiscal deficit of the Indian government. Moreover domestic plant and machinery manufactures would be closing down their business since no records of proper cost audit is being maintained.
  5.     Drugs and Pharmaceuticals & Bio-technology industry- India currently is the growing hub for low cost drugs and low cost health facility. Every country across the globe is extensively jealous on this low cost healthcare and biotechnology expansions of India. With the abolishment of COST AUDIT and making it partially  for these industries there will no uniform costing methods and hence prices would escalate and Indian healthcare and biotechnology industry would not remain competitive and low cost for a very long period. According to data released by the Department of Industrial Policy and Promotion (DIPP), hospital and diagnostic centers attracted foreign direct investment (FDI) worth Rs 11,272.32 crore (US$ 1.87 billion) between April 2000 and February 2014. The allowance of foreign direct investment (FDI) in India’s Parma sector was well received by foreign investors. The cumulative drugs and pharmaceuticals sector attracted FDI worth US$ 11,588.42 million in the period April 2000–February 2014, according to data published by Department of Industrial Policy and Promotion (DIPP) India is the king of low cost generic drug segment but with the abolishment of cost audit India will not remain destination of low cost. For this long journey of the growth of this industry COST AUDIT was the prime factor which clearly depicted the true cost values which made this industry attractive for India and also for global investments. Indian biotechnology sector is divided into five major segments – pharmacy, services, agri, industrial, and informatics. The bio-pharmaceutical sector accounted for the largest share of the biotech industry, with a share of 64 per cent in total revenues in FY 13, followed by bio-services (18 per cent), bio-agri (14 per cent), bio-industrial (3 per cent) and bio-informatics (1 per cent).Revenue from bio-pharmacy exports contributes more than 64.5 per cent to total export revenues in the biotech industry; exports from this segment grew by 25 per cent to reach US$ 1.4 billion in FY 13.But now COST AUDIT being abolished this industry would become slowly unattractive. FDI investments would also decline since profitability is the key parameter for them to enter into any economy.  Just calculate about the loss the government would face once the cost audit is abolished or made partially in this segment.
  6.        White good (domestic refrigerators, domestic dishwashing machines- Well prices of these products would increase and down the line with no proper cost audit and costing methods FDI investments in India would decline slowly. After abolishment of cost audit for this industry pricing of raw material and ancillary industries prices would also increase which would make price of the products expensive in term of domestic production. Then we would find later on that imports of these products are being made in India and domestic manufactures are unemployed.
  7. .       Water supply and sanitation, Social welfare and nutrition, Urban Development, Family welfare- These are industries where government spends its tax payers money for the development of the society and also of the economy. This is another industry where India gets huge billions of money from WORLD BANK & Asian Development Bank. Now if their no cost audit and costing methods for this industries and segment will WORLD BANK and Asian Development Bank would provide funds. Moreover how government would measure the proper utilization of funds and results there to.   If cost audit is abolished then high level of inefficient resources and funds will be practiced and government would not be able to measure and detect the same.
  8. .       Component parts and accessories of automobiles & - India is the growing hub of small car manufacturers. FDI investments have been ruling the Indian markets over the last decade. The cumulative foreign direct investment (FDI) inflows into the Indian automobile industry during the period April 2000 to January 2014 was recorded at US$ 9,344 million, as per data published by Department of Industrial Policy and Promotion (DIPP), Government of India. The Indian auto component industry is estimated to have a US$ 66 billion turnover by 2015–16 and is expected to grow at a 14 per cent compound annual growth rate (CAGR) by 2013–2021, according to Automotive Component Manufacturers’ Association of India (ACMA) – the nodal agency for the Indian auto component industry. In addition, industry exports are estimated to reach US$ 12 billion by 2015–16. Now with abolishment of cost audit every company under this industry would adopt different methods of cost audit which would result to increase in prices and later on this industry would lose the competitiveness. FDI investments would start declining and over the next 5 years India would not be low cost Auto Component industry in India. Ancillary industries would also find an exit option from Indian market.
  9. .       Textile machinery & cotton and woolen textiles - India is the one of the world's largest producers of textiles and garments. Abundant availability of raw materials such as cotton, wool, silk and jute as well as skilled workforce have made the country a sourcing hub. It is the world's second largest producer of textiles and garments. The Indian textiles industry accounts for about 24 per cent of the world’s spindle capacity and 8 per cent of global rotor capacity. The potential size of the Indian textiles and apparel industry is expected to reach US$ 223 billion by 2021, according to a report by Technopak Advisors.  The industry (including dyed and printed) attracted foreign direct investment (FDI) worth Rs 6,710.94crore (US$ 1.11 billion) during April 2000 to February 2014. Now with the abolishment of the cost audit for this industry domestic machineries would hardly find any space and most of the machineries would be imported and the cost of the same would be capitalized over long period of time and government tax revenues from this industry would decline. Without costing how the government would assess whether a specified company would require replacements of its machineries.
  10. .   Tea, Coffee, Plantation Structural Infirmities, Plantations, Food Storage and Warehousing, Spices, Rubber-1.   Information and broadcasting- The Indian information and broadcasting industry over the last 14 years - The industry has evolved over the last decade against the backdrop of shifting consumer preferences toward niche content and digital delivery platforms, growing business models, hyper-competition with the entry of local and global players, and changing regulations. The adaptation of digital media from analog broadcasting has generated business avenues for OEMs and related hardware and software partners. The Indian broadcast and cable TV industry estimated at Rs. 38,500 crore in 2011-12 is projected to grow at a CAGR of 12 percent to reach Rs. 54,720 crore by 2014. Cost Audit has been abolished after this staggering growth the industry. I have nothing to repeat that in the long term this industry would lose its competiveness.
  11. .   All PPP projects- The biggest blunder which has been done is that removing cost audit for all the PPP model projects. How these projects would be competitive would be the biggest point of discussion.  FDI investments would only come when the ROI and ROE is much higher compared to their won Country PPP model of business. Now for making this ROI and ROE higher proper and efficient cost management and cost audit is required. Hence in the long term these projects would become unviable once the prices and ROE and ROI declines.

Well this is my first part of the damages of the various industries and of the Indian economy in the long-term through abolishment of cost audit. I am yet to cover many other industries which I would cover in the 2nd series. All I can find is that if COST AUDIT is abolished then Indian competitiveness in the Global Platform is being planned to bring down. Well be proud to be a cost accountants we are building the nation over the last 5 decades.

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