Monday, April 18, 2016

Threat to Indian Pharma Industry …Ignoring Cost Audit Applicability


My piece of article is to attract the attention of our Honorable Prime Minister alerting his government and other ministers of various industries to save the Indian economy from the collapse of the competitiveness of India in the global map. Its being found this matter to be taken on serious note and request the Honorable Prime Minister should interfere to understand the long term damage of the Indian economy through the ignorance of Cost Audit applicability in many industries.  Our Current government and our Honorable Prime Minister are trying hard to attract overseas investments in various sectors and make India to be a global exporting hub. Make In India the term can be criticized and can be taken in an high positive opportunity for the upcoming sustainable economic growth of India. In between what I find that the internal meaning of Make In India is that India is an low cost producing country and the government is focused towards providing sops, taxation benefits etc for the attracting overseas investments into the country.  It means India is a low cost producing country compared to other countries and Indian government will give tax benefits and other incentives to make these investments into profitable compared to other countries.

But How the Current Government and Honorable Prime Minister will come to know what type of tax benefits and is India a low cost producing country. Cost Audit Report use to guide and help these things but in 2014 it has been cut down in many  industries and even capped at higher levels in terms of turnover and on other parameters. My question to the Prime Minister and other Misters of the Industries that how you will decide the benefits for the growth of an Industry and how you will succeed in make in India if you don’t have data to measure. Cost Audit and Cost Accountants used to provide the data. Its immaterial what the previous government recognized and the policy action there to.  Honorable Prime Minister we are discussing about the growth of the Indian economy during your reign and also over the long term. We are discussing about the long term growth of the Indian GDP.

The reason, why I am raring this issue is that currently few industries of India are shifting their base ion overseas countries where employment to capital investments from plant and machinery to government revenue will flow into those countries pockets. I fear that Indian economy will lose a huge amount of taxation revenue as well as exporting country title over the long term. Currently a Major industry of Indian economy is on the way of flight of shifting from India.

Generic Drug market is quite big opportunity for the Indian pharma companies. The pharmaceutical industry in India has grown from mere US$ 0.3 billion turnover in 1980 to US$ 20 billion in 2014-15. The Government of India unveiled 'Pharma Vision 2020' aimed at making India a global leader in end-to-end drug manufacture.  India’s exports are expected to account for 72% of the total pharma production and reach a value of $40 billion by 2020. Generics dominate the pharmaceuticals market, constituting nearly 70 to 80 per cent of the market. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. India’s pharmaceutical export market is thriving due to strong presence in the generics space.But this plan of achievement will fail miserably as many wrong policy decisions as the macro level have been taken recently in 2014. Before we get into the details of the catastrophic collapse of the vision we need to have an idea about the future growth of the Indian pharma industry.

Threat for Indian Economy as production facility shifts
Now the opportunities are big but there is significant threat to the Indian economy in terms of export income from the pharma industry through the generic drug segment. Recently the Japanese government has invited Indian pharmaceutical companies to set up ventures in that country to meet the growing demand for high quality and inexpensive generic medicines. Indian pharmaceutical firms are eyeing JV opportunities in Japan's growing generic market as the Japanese government aims to increase the penetration of generic drugs to 60 per cent of the market by 2017 from 30 per cent in 2014, due to ageing population and rising health costs. This will lead to shift of jobs, demand of plant and machineries and investment capital to other countries. This is an economic loss to the Indian government measured over a long period of time. Many small and medium pharma companies will enter into JV with Japanese firms and African Firms and will lead to shift of manufacturing base to these countries.   In FY15, pharmaceuticals industry of India exported products worth USD15 billion and the exports are expected to reach USD40 billion by 2020. This 2020 dream might not be achievable as exporting hubs in India are shifting to other countries and this will create loss of revenue and employment for the India government.
Don’t compare Indian markets with US and Europe in terms of low cost production facility. New markets like Russia, Latin America Japan are joining the wagon of low cost producing. I would like o draw the attention of the prime minister of India to look into these new threats. Its true that India’s cost of production is nearly 60 per cent lower than that of the US and almost half of that of Europe. Labour costs are 50–55 per cent cheaper than in Western countries The cost of setting up a production plant in India is 40 per cent lower than in Western countries. But if I compare the same with Japan and other countries Indian exports are at threat.

Reasons for Shift
The reason for shifting is that these countries are low cost producing countries and they will take many cost advantages as these countries don’t have thresh hold for cost audit applicability.  We all know Japan have been pioneer country in terms of  application of costing tools like  Kaizen costing, Just in Time (JIT),Activity based costing ,Life cycle costing, Target Costing and many other costing tools. Japan has strong management accounting system which has been one of the key reasons for making its industry competitive compared to US in the history. Cost Audit and its Applicability have been revised in the year 2014 where many industries either completely abolished or partially abolished and in some case the threshold limit have been hiked to such extent that many industries don’t come under the cost audit applicability. Further Six leading pharmaceutical companies have formed an alliance ‘LAZOR’ to share their best practices, so as to improve efficiency and reduce operating costs. Once they achieve the same they will shift out from the Indian markets and open shops in those countries.
   Loss to the Indian economy
Now recently cost Audit rules have been capped for pharma and Drug segment where applicability of Cost Audit will be subject to a turnover of Rs 50 cr for all products an services and Rs 25 cr for individual product.  The cap is working against of the Indian economic growth as many companies will make flight of investments and manufacturing as they are unable to measure neither the government is able to measure cost advantage achieved by the industry while operating in India. Cost Audit applicability helped the industry as well as the government to design incentive plans for the growth of the Industry. Now the biggest proof of growth based incentive for the industry growth can be measured through the FDI Inflows when cost audit was compulsory for the Indian Pharma industry. The biggest loss will the generic drug export market of India will come down dramatically if pharma companies loose low cost exporting competitiveness. The share of the generic drug market is 70% currently.

 When Cost Audit Applicability was In Place
Just look that when cost audit applicability was not at all there for the Indian pharma industry during 2000 to 2011,  the sector attracted cumulative FDI inflows worth US$ 10.32 billion between April 2000 and September 2011, according to data released by the Department of Industrial Policy and Promotion (DIPP). This inflow will come down significantly over the years as more companies will shift to Japan and African countries taking advantage of low cost of production and also efficient costing methods and efficient audit mechanisms.

The loss will not restrict to the Indian pharma industry, it will spill over to other industries which lead to catastrophic loss for the Indian economy in the long term. Moreover the FDI investments will come down significantly after the restriction of cost audit applicability.

I request our Honorable Prime Minister to look into the matter and save the Indian GDP growth over the long term.
Registration Number is : PMOPG/E/2016/0125520

1 comments:

Unknown

threshold limit for cost audit should be removed. all listed companies should be uniformly brught into cost audit mechanism . tariff commissiion and other stakeholders in the company deserve better analysis of their margins to avoid satyam like scam . once treshold is removed the profession will grow beyond CA and really contribute positively to the economy

k s subramanian FCMA

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