Economic Environment of Business
Report On
“COST EFFECTIVENESS AND INDIAN INDUSTRY”

Course Instructor: Dr. S.P. Das

Economic Environment of Business
Report On
“COST EFFECTIVENESS AND INDIAN INDUSTRY”

Course Instructor: Dr. S.P. Das

Submitted By: | Astha MathurSection C | Roll No.: | UM15135 |

Submitted By: | Astha MathurSection C | Roll No.: | UM15135 |

CONTENT

Sr. No | Title | Page No. | 1 | Abstract | 4 | 2 | Introduction | 4 | 3 | Overview of Indian Industry | 4 | 4 | Implementing Cost Effectiveness | 6 | 5 | Implications of Cost Effectiveness | 7 | 6 | Break-Down of Indian Industrial Sector | 8 | 7 | Government initiatives to support for Cost Effectiveness in Indian Industry | 11 | 8 | Conclusion | 16 |

ACKNOWLEDGEMENT

We would like to express a whole-hearted gratitude to all those who have helped with the report or have been associated with the report in any which way and made it a worthwhile experience.
We are greatly indebted to our batch mates and our seniors for having shared their invaluable experience that went a long way in the successful completion of our report.
We are also grateful to Dr. S.P Das who has given us the opportunity for working on such a project and incessant support & guidance leading it to successful completion.
Thank you.
We would like to express a whole-hearted gratitude to all those who have helped with the report or have been associated with the report in any which way and made it a worthwhile experience.
We are greatly indebted to our batch mates and our seniors for having shared their invaluable experience that went a long way in the successful completion of our report.
We are also grateful to Dr. S.P Das who has given us the opportunity for working on such a project and incessant support & guidance leading it to successful completion.
Thank you.

1. Abstract

The aim of the project is to identify what is the cost effectiveness, how it is implemented and how important is it in context with the Indian Industry. Apart from this we also aim to study the segmentation of Indian Industry into multiple sectors and segments and identify the government initiatives that support the cost effectiveness of the firm and make the Indian Business Environment conducive for Business operations.

2. Introduction

Cost Effectiveness is the relationship between monetary inputs and the desired outcome, such as between the expenditure on an advertising campaign and increase in sales revenue.

When deciding to start a new program or venture for your firm, it’s important to measure its' cost effectiveness. If you're not going to be getting out more than what you put in it just simply isn't worth the effort.

To implement cost effectiveness we perform Cost-effectiveness analysis (CEA) is a form of economic analysis that compares the relative costs and outcomes (effects) of two or more courses of action. Cost-effectiveness analysis is distinct from cost–benefit analysis, which assigns a monetary value to the measure of effect.

The concept of cost effectiveness is applied to the planning and management of many types of organized activity. It is widely used in many aspects of life. In the acquisition of military tanks, for example, competing designs are compared not only for purchase price, but also for such factors as their operating radius, top speed, rate of fire, armour protection, and calibre and armour penetration of their guns.
Cost effectiveness analysis is also applied to many other areas of human activity, including the economics of automobile usage.

3. Overview of Indian Industry:
In 2014-15, the Indian economy has started showing signs of gradual improvement with business expectations, exports and industrial production recuperating. This more favorable outlook reflects stronger sentiment resulting from the new government’s promise to prioritize economic reforms and enhance the country’s business environment. Several decisive steps taken by the government like the industrial corridor development, 8,500 km road construction, 16 new ports, and broadened financing base, among others, aim to not only accelerate the pace of infrastructure growth, but also restore investors’ confidence.

Industrial corridors are likely to be the primary drivers of India’s growth in manufacturing and urbanization. This, coupled with allowing 49 per cent foreign direct investment (FDI) in the defense sector and other such incentives provided in the budget, shall definitely provide a fillip to the manufacturing sector.

Infrastructure development, which is a key to bring back the strong growth momentum in the economy, received a boost when the Japanese government committed to invest 35 billion dollars over the next five years in India to build smart cities and finance infrastructure projects. Economic growth is likely to accelerate in the next fiscal as the reform process continues and begins to bear fruit.

The GDP forecast for the next fiscal is driven by a partial unclogging of domestic policy logjam as well as improved global growth prospects. This, together with improved private consumption demand is likely to trigger a revival in industrial growth in 2014-15. Sectors such as consumer durables, automobiles and textiles will especially gain from this revival. The mining sector, which has been plagued by policy issues since July 2011, is also forecast to expand for the first time in three years. The mining ban on iron ore in Karnataka and Goa has already been lifted and mining growth will pick up, as firms obtain relevant clearances and resume operations. We believe that the recent momentum on resolving mining issues will continue into 2014-15 and will help address supply-side constraints for industries, particularly in the steel and power sectors.

The government has already taken many steps (making funding easier for infrastructure sector, expediting approval process, de-bottlenecking the system, simplifying bureaucratic complexities, restoring confidence of the investors, etc.), which can produce visible improvements over the next few quarters. Foreign exchange reserves increased by nearly US$ 40 billion from US$ 275 billion in early September 2013 to US$ 314.9 billion on 20 June 2014. These developments on external account have generated some optimism that the Indian economy is better prepared to confront the challenges of global policy reversals, including tapering of quantitative easing in the US.

4. Implementing Cost Effectiveness

All cost-effectiveness analyses should be subjected to sensitivity analysis, which should be included as part of the reporting of the findings.

Cost-effectiveness is only one of a number of criteria that should be employed in determining whether interventions are made available. Issues of equity, needs and priorities, for example, should also form part of the decision-making process.

There are significant benefits associated with managing product costs, yet many manufacturers struggle to implement effective programs to do so. And though many people and departments within an organization can influence product cost, traditionally, product cost management (PCM) gets done by cost-engineering or value-analysis experts with strong manufacturing or cost-estimating backgrounds.

Their expertise is invaluable, but it is difficult to be knowledgeable about all products and their cost drivers in a large organization. A better approach to PCM employs systematic, company-wide processes and tools to guide decisions. This lets manufacturers attack product cost at the source and yields the greatest impact.

Effective PCM starts in manufacturing design and engineering and includes:

* Studying the cost tradeoffs of different design concepts. Several alternatives might meet the same requirements, but each may come with a different cost.

* Evaluating the effects of engineering change orders.

* Comparing manufacturing and tooling alternatives, including make-versus-buy analysis.

* Validating supplier quotes to ensure lowest pricing. A vendor’s costs are often negotiable and depend on plant cost structure, capabilities, and process control.

* Evaluating multiple cost-reduction ideas on current products in real time to quickly identify the greatest potential savings.

These activities apply throughout a product’s life and include key cost control points during the development process. This allows for measurable, managed checkpoints that dictate where and when people should perform specific PCM activities. For example, there are typically design review meetings at regular intervals to ensure a new product meets form, fit, and functional requirements. However, rarely is there a conversation about the financial implications of the alternatives being evaluated. Effective PCM should include mandatory cost evaluation as part of key design-review milestones.

Likewise, when a design gets released, manufacturing often must decide to make or buy the parts or components. A company with a cost control point at that milestone would quickly calculate the financial impact of both options, and make an economically-wise decision in a fraction of the time it takes to request quotes and manage responses from suppliers.

Effective PCM puts proper tools in the hands of anyone who influences product cost. These tools help assess and track detailed product costs at any stage, without requiring special manufacturing or cost expertise. It empowers employees to act on opportunities to reduce costs.

Without these processes and tools, PCM remains highly manual and decentralized, of value only to manufacturing or cost-engineering experts. Estimation methods are inconsistent, dependent on static information that is difficult to update and share. And the process can only take place once or twice per new-product cycle, severely limiting the window to identify savings.

5. Implications of Cost-Effectiveness

While cost-effectiveness analysis is a useful technique for assisting in the decision-making process, there are important issues to consider.

* Cost-effectiveness analysis can indicate which one of a number of alternative interventions represents the best value for money, but it is not as useful when comparisons need to be made across different areas of healthcare, since the outcome measures used may be very different. As long as the outcome measure is life-years saved or gained, comparisons can be made, but even in such situations cost-effectiveness analysis remains insensitive to the QoL dimension. In order to know which areas of healthcare are likely to provide the greatest benefit in improving health status, a cost–utility analysis needs to be undertaken using a ‘common currency’ for measuring the outcomes across healthcare areas. If information is needed as to which interventions will result in overall resource savings, a cost–benefit analysis has to be done, although both cost–utility analysis and cost–benefit analysis have their own drawbacks.

* The quality of cost-effectiveness analyses is highly dependent on the quality of effectiveness data used, and all cost effectiveness analyses should include a detailed sensitivity analysis to test the extent to which changes in the parameters used in the analysis may affect the results obtained. A useful checklist for assessing cost-effectiveness studies is to be found in Box 1.5

* Cost-effectiveness is only one of a number of criteria that should be employed in determining whether interventions are made available. Issues of equity, needs, and priorities and so on should also form part of the decision-making process.

6. Break Down of Indian Industrial Sector:

6.1 Automobile Sector: * Indian Auto industry is one of the largest in the world with an annual production of 21.48 million vehicles in 2014. * It accounts for 22% of Countries Manufacturing GDP. * India is set to become the leader in two wheeler and four wheeler market in the world by the year 2020 * Expanding middle class young population and increased rural markets are the reason for this growth

6.2 Banking: * Dominated by 46 commercial banks. * 80% of Indian Banking Segment is handled by state banks. * Credit growth in Indian banking sector would improve to 12-13% in FY’16. * Total Credit Extended went up by US$ 1.28 trillion by October 31’st 2014. * Rising incomes are expected to enhance the need for banking services in rural areas and therefore bribe the growth of the Indian banking sector.

6.3 FMCG: * Expected to grow at 12% in 2016. * Reaching the sales figure of us$ 49 billion. * Consumer durable market expected to grow at CAGR of 13% by FY’20.

6.4 Textile: * Currently at around US$ 108 Billion and expected to reach US $141 Billion by FY’21 * Contributes approximately 5% to GDP, 14% to IIP. * Indian textile industry has attracted FDI worth US $ 152251 million * Second largest producer of Textile and Garments

6.5 Health Care: * Currently valued at US $65 Billion of which hospitals supplies and health care equipment is around US$ 5 million. * Expected to grow at CAGR of 17% during 2011-2020. * Of total health care revenues in the country hospitals account for 71% pharmaceutical for 13% and medical equipment’s and supplies for 9%.

6.6 Information Technology: * India is the world’s largest sourcing destination for IT Industry. * Accounts for approximately 52% of US$ 124 -130 Billion market. * IT-BPM is estimated to expand at CAGR of 9.1% to US $ 300 billion by 2020. * Government of India has extended tax holidays to IT sector for STPI and SEZ to boost the growth of Indian IT Industry.

6.7 Metal and Mining: * Indian is the world’s third largest producer of coal and expected to become second largest steel producer by 2016. * The metal mining industry is expected to reach 305.5 billion in 2016. * Registered a CAGR of 5.2%. * Government of India has allowed 100% FDI in the mining sector under the automatic route.

6.8 Power: * The planning commission’s 12th plan expects total domestic energy production to reach 669.6 million tons of MTOE by 2016-17. * Total thermal installed capacity stood at 168.4 GW while hydro and renewable energy installed capacity total 40.5 GW and 31.7 GW respectively. * Wind Energy market of India is expected to attract about Rs. 20000 Crore of investment in 2016.

6.9 Service Sector: * Total mobile service market revenue India reached US$ 29.8 Billion in 2014 is expected to touch US $37 Billion in 2017. * The Indian Electronics Industry today stands at US $25 Billion and ranked 26th in the world in terms of sales. * By 2020 Indian Tourism Industry is expected to contribute Rs. 8 lakh 50 thousand Crore to the GDP.

6.10 Agriculture Sector: * Increasing private Sector Participation in Agriculture Industry, Organic Farming and usage of latest scientific technologies are trends being witnessed by the agricultural industry. * India is the biggest producer of pulses and the biggest Exporters as well. * Second largest producer of Sugar and second largest agricultural land in world a total of 157.35 million hectares. * GDP of agriculture and allied sectors in India was recorded at US $156.1 Billion.

7. Government Initiatives for supporting Cost Effectiveness in Indian Industry

The government has also launched a number of schemes for cost effective development in micro, small and medium enterprises (MSMEs). These include – * Lean Manufacturing Competitiveness Scheme: Implemented under the Public Private Partnership (PPP) mode with 42 Lean Consultants , the project aims to reduce manufacturing waste, and increase productivity and competitiveness.

* Design Clinic Scheme: This is a platform to enable MSME‟s to avail expert advice and cost effective solutions to real-time design issues. The scheme includes two projects – Design Awareness and Design Project Funding.

* Marketing Assistance and Technology Upgradation: The scheme focuses to upgrade technology for increasing competitiveness in marketing. Activities included in this scheme are technology upgradation for packaging, competition studies, and development of marketing techniques. * Technology and Quality Upgradation: The scheme aims to encourage MSMEs to adopt global standards so as to improve the quality of goods produced.

7.1 Cost Effective Initiatives for automobile sectors

The Indian government encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. It is a fully delicensed industry and free imports of automotive components are allowed. Moreover, the government has not laid down any minimum investment criteria for the automobile industry.

Besides offering a liberal FDI regime, the government has made successive policy changes that allow for stronger growth in the automotive sector. Major among these are:

* Automotive Mission Plan: Prepared by the Ministry of Heavy Industries and Public Enterprises, the Automotive Mission Plan aims to accelerate and sustain growth in the sector over the period 2006 to 2016. Under the plan, it is aimed to make India a global automotive hub, with special emphasis on the export of small cars, MUVs, two- and three-wheelers and auto components. The plan also aims to double the contribution of the automotive sector to the country’s GDP by taking its turnover to USD 145 billion and providing additional employment to 25 million people by 2016.

* National Automotive Testing and R&D Infrastructure Project: This is a USD 388.5 million initiative of the Government of India and various state governments; it is aimed at creating a state-of-art and dedicated testing, validation and R&D infrastructure across the country.

8.2 Cost Effective Initiatives for agricultural sector

Given the importance of the agriculture sector, the Government of India, in its Budget 2016–17, planned several steps for the sustainable development of agriculture.

Budget 2016-17 proposed a slew of measures to improve agriculture and increase farmers’ welfare such as 2.85 million hectares to be brought under irrigation, Rs 287,000 crore (US$ 42.11 billion) grant in aid to be given to gram panchayats and municipalities and 100 per cent village electrification targeted by May 01, 2018.

Some of the recent major government initiatives in the sector are as follows:

* Prime Minister Mr Narendra Modi has unveiled the operational guidelines for the Pradhan Mantri Fasal Bima Yojana which aims to provide farmers with crop insurance as well as

* The Cabinet Committee on Economic Affairs (CCEA) has approved ‘Blue Revolution’, an umbrella scheme for integrated development and management of fisheries by Government of India, with total financial outlay of Rs 3,000 crore (US$ 440.15 million) for a period of five years.

* Mr Piyush Goyal, Minister of Power, Coal, New and Renewable Energy has announced that government’s plans to invest Rs 75,000 crore (US$ 11.08 billion) in an energy-efficient irrigation scheme over the next three to four years.

* The new crop insurance scheme for farmers 'Bhartiya Krishi Bima Yojana' aims to cover 50 per cent of the farmers under the scheme in the next two-three years.

8.3 Cost Effective Initiatives for Services sector

The Government of India recognizes the importance of promoting growth in services sectors and provides several incentives in wide variety of sectors such as health care, tourism, education, engineering, communications, transportation, information technology, banking, finance, management, among others.

The Government of India has adopted a few initiatives in the recent past. Some of these are as follows:

* The Central Government is considering a two-rate structure for the goods and service tax(GST), under which key services will be taxed at a lower rate compared to the standard rate, which will help to minimize the impact on consumers due to increase in service tax.

* By December 2016, the Government of India plans to take mobile network to nearly 10 per cent of Indian villages that are still unconnected.

* The Government of India has proposed provide tax benefits for transactions made electronically through credit/debit cards, mobile wallets, net banking and other means, as part of broader strategy to reduce use of cash and thereby constrain the parallel economy operating outside legitimate financial system.

* The Reserve Bank of India (RBI) has allowed third-party white label automated teller machines (ATM) to accept international cards, including international prepaid cards, and has also allowed white label ATMs to tie up with any commercial bank for cash supply.

* The Government of India has started promotion of its ‘India Handloom’ initiative on social media like Facebook, Twitter and Instagram with a view to connect with customers, especially youth, in order to promote high quality handloom products.

* The Ministry of Textiles launched Technology Mission on Technical Textiles (TMTT) with two mini-missions for a period of five years (from 2010-11 to 2011-12 in the 11th five year plan and 2012-13 to 2014-15 in 12th five year plan) with a total fund outlay of Rs 200 crore (US$ 30 million). The objective of TMTT is to promote technical textiles by helping to develop world class testing facilities at eight Centers of Excellence across India, promoting indigenous development of prototypes, providing support for domestic and export market development and encouraging contract research.

7.4 Cost Effective Initiatives for Financial sector

Several measures have been outlined in the Union Budget 2015-16 that aim at reviving and accelerating Financial Sector, inter alia, include fiscal consolidation with emphasis on expenditure reforms and continuation of fiscal reforms with rationalization of tax structure.

* The Government has also announced several schemes to improve the extent of financial inclusion. The Prime Minister of India has launched the Micro Unit Development and Refinance Agency (MUDRA) to fund and promote microfinance institutions (MFIs), which would in turn provide loans to small and vulnerable sections of the business community. Financial Services Secretary Mr Hasmukh Adhia has announced that the ministry will launch a campaign for loans under Pradhan Mantri Mudra Yojana (PMMY) in order to double loan disbursement to the small business sector to over Rs 100,000 crore (US$ 15 billion).

* Government of India’s ‘Jan Dhan’ initiative for financial inclusion is gaining momentum, as the number of bank accounts opened by July 15, 2015 has more than doubled to 169 million from 68.7 million at end of October 2014, Government of India aims to extend insurance, pension and credit facilities to those excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY). The Union Cabinet Minister has also approved the Pradhan Mantri Suraksha Bima Yojana which will provide affordable personal accident and life cover to a vast population.

* The Union Cabinet has approved 100 per cent Foreign Direct Investment (FDI) under the automatic route for non-bank entities that operate White Label Automated Teller Machine (WLA), subject to certain conditions.

* Minister of Finance Mr Arun Jaitley has formally declared the merger of Forward Markets Commission (FMC) with Securities and Exchange Board of India (SEBI), which help convergence of regulations in the commodities and equity derivatives markets.

* The Insurance Regulatory and Development Authority of India (IRDA), as part of its endeavor to increase insurance sector growth, has allowed a new distribution avenue called the ‘point of sale’ person, who will be allowed to sell simple standardized insurance products in the non-life and health insurance segments, which are largely pre-underwritten.

8. Conclusion:

Firms find it difficult to implement cost effectiveness into their operating environment without the support of government. Cost Effectiveness plays a very important role in attracting FDI, new foreign players and domestic investment. Until and unless the environment for business operations is made cost effective the investment, production and revenue generation in the economy would be low. The government of India has launched multiple schemes to support the objective of cost effectiveness in Indian industry and its positive effects can be well seen in the growth rate of Indian Economy.