Well India has presented its Budget and billions of analysis has been already executed. Well I find that this budget would be finding a hard place to land due to the recent COST AUDIT & COSTING METHODS abolishment. Now my readers my say that extrapolating and trying to mix cost audit in everything I write. The point is this that abolishment of cost audit and costing accounting would be having a longer affect and slow poising affect on the Indian economy which may not be visible in the shorter times frames. We need to figure out where COST AUDIT Report and COSTING METHODS have not been applied and where the previous government failed to realize the benefits as well the affects of the failures on the Indian industries and Economy. In short I have portrayed the picture of the government to make the COST AUDIT report to be economy developing & Industry developing blueprint.
Fiscal deficit has become huge problem and going forward there would be more problem. Government did not use the COST AUDIT reports at any point of time otherwise this catastrophic level of fiscal deficit would not have come. COST AUDIT Report helps the government to find which industries need to focus more on domestic resources rather than import. Its well clear that today the LED TV which we have in our homes are imported items and we Indians don’t manufacture them. The Phones which we use and the spare parts related to that are imported items and not domestic manufactured. Now if government should have utilized the COST AUDIT reports then we should have created another Japan in India in terms of hardware technology. This should have created immense job and direct tax & indirect tax revenue for the government. Now the affect of this negligence is that I find that currently companies from these industries in infrastructure, construction space, irrigation, fertilizer sectors expected payment on their receivables due from government. Moreover with the fiscal deficit target, worries continue to remain as burden on all these companies from these industries.
The profession of COST ACCOUNTANCY is dual profession which helps the Government to build a sustainable economy as well as to the corporate who justify their costing in parallel to the global standards. The level of negligence the Indian government has done to the COST AUDIT Report and COSTING METHODS benefit is that 70% of aggregated balance sheet debt of BSE 500 corporates (excluding banking and financial services) belongs to net importers. These net importers are also responsible for 76% of aggregated foreign currency (FC) debt of BSE 500 corporate. So the rupee level of 68 is now very much clear.
Now if COST AUDIT REPORT is really used judiciously for an industry this sharp depreciation of the rupee should have been huge advantage for the Indian corporate as well as for the Indian government. The foreign currency importers companies EBITDA (in INR terms) detoraite by 1.3% for 1% depreciation in the Indian rupee against the US dollar. The challenge for these net FC spenders is aggravated since 17% of their aggregated debt is foreign currency debt, which also accounts for 76% of aggregated FC debt of the BSE 500 corporates. On the other hand 47 % of BSE 500 corporate are net FC earners and they are estimated to enjoy a 1.6% increase in EBITDA (in INR terms) for 1% INR depreciation.
On the other side the government is well aware that inflation might not come down hence corporate would find difficult to manage their cost of capital for expansion. Hence the smartest move was to extend withholding tax at the rate of 5% on all bonds issued by Indian corporate as well as liberalizing the procedure for ADR/GDR issuances supports the endeavor to attract foreign capital. Now with the removal of COST AUDIT and COSTING Methods it would be quite difficult in the long term to use a standardized costing methods as well as in countries where ADR and GDR would be raised they are having cost and management accounting reports as their best practices in the financial segment. Now lack of uniform methods would lead to confusion about the process of treating various cost and expense leading difficulty for the corporate to raise capital in the long term.
Now the most interesting part of my research is that COST AUDIT Removal and COSTING METHODS have been abolished are the ones who will are currently suffering pains and going forwards would find more pains. The below data shows the As of FY13, 221 of the BSE 500 corporate have negative sensitivity. Their operating margins are likely to suffer in the event of sustained rupee depreciation. These corporate account for 70% of the aggregated balance sheet debt of the BSE-500 corporate.
Now lets us map the industries where COST AUDIT report have been abolished with the long term affect of the Industries related to the fiscal deficit, rupee depreciation and negligence form the government to understand the benefits of the COST AUDIT report. Well the problems would aggravate more in the long term by removing the COST AUDIT completely.
Consumer Durable: These sector corporate flows have been consistently deficit since FY07. The corporate deficit reduced in FY13 to INR45bn from INR58.4bn in FY12 driven by a 20% reduction in total outflows in FY13. Majority of the outflows are on account of imports by companies such as Voltas Ltd (finished goods, components, spares), Whirlpool Ltd (import of components like compressors) accounting for 92%-96% of the total FC outflows. Now these companies are India is assembling plants and Indian government gave less focus to domestic manufacturing of these spare parts etc. This is the place where the government failed to adopt the results of the COST AUDIT Reports. The sensitivity change ranges from -2.6 to -3 for FY12-FY13.
FMCG: This sector is largely immune to foreign exchange volatility mainly due to sector„s proportion of forex revenues to total revenues and proportion of foreign expenditure to total expenditure is very low. Hindustan Unilever Ltd (HUL), ITC Ltd and Nestle Ltd together contributed between 72.1%-72.9% during FY11-FY13. ITC recorded nearly 47% yoy increase in outflows in FY12, driven by an increase in the import of capital goods (INR7.05bn). While HUL posted a 27% yoy decrease in outflows in FY12, Nestle‟s outflows more than doubled (increase by 104% mainly on account of increase in the import of capital goods to INR7.2bn from INR1.1bn) yoy in the same year. Now ignorance of COST AUDIT report has resulted import of capital goods into the country which could have been domestically manufactured strengthening the Indian economy in engineering industry.
Auto Suppliers: has seen consistent net deficits since FY07. Over the years the deficit has widened to INR67bn in FY13 from INR15bn in FY07. Imports account for around 84%-85% of the outflows in FY11-FY13. Hence its very well clear that India is an assembling plant and not an base of manufacturing spare parts are still being imported and even the replacement market import of automobile spare parts still increases at a compounding rate. Now at the same time application of efficient costing methods and cost audit followed with own base of manufacturing auto suppliers like Balkrishna Industries, Bharat Forge Ltd, Cummins India Ltd, Sundaram fasteners Ltd stand to benefit in the event of rupee depreciation, due to their revenue and cost structure.
Chemicals & Chemical Products: This sector has been in overall deficit since FY07 consistently as India economy is still dependent largely on importing chemical goods in large quantities. The foreign currency outflows have grown at a CAGR of 20.8% since FY07. The deficit was INR55bn in FY13 and has grown at a CAGR of 32% since FY07. The top four most sensitive corporate in this sector include Astral Poly Technik Ltd., BASF India Ltd. Finolex Industries Ltd. and Gulf Oil Corporation Ltd. On the other hand companies which adopted costing methods judiciously and cost audit Atul Ltd, Gujarat Fluorochemicals Ltd, and Jai Corp Ltd because of their revenue and cost structure.
The import dependency nature of the Indian economy is reflected FC expense of its largest corporate. Further the ratio of FC expense as a proportion of overall expense is around twice the ratio of FC revenue to total revenue. Now obviously in these situations debt profile of the Indian economy is bound to increase. Digging further I have found the respective deficit industry specific wise and it clearly shows about the ignorance of COST AUDIT Report and its suggestion negligence.
Since 2007, the export of goods has contributed 69%-74% of the total FC inflow while the remaining portion was from non-good revenue in foreign currency. Well COST AUDIT Report negligence and adoption is equally divided within the Corporate India.
Global Macro Economic Researcher and Business Strategist
Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist