Analysis of Transaction Cost by Manoj Shah

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Analysis of Transaction Cost
by Manoj Shah
Analysis of Transaction Cost

Contents
• Preface
• List of Abbreviations
l. Overview of Sugar Industry 1
2. Research Methodology and Review of Literature on Transaction Cost 28
3. Conceptual Framework of Transaction Cost 50
4. Analysis of Cost Behaviour Vis-a-Vis Profitability 80
5. Analysis of Financial Performance 181
6. Analysis of Transaction Cost and Transaformation Cost 295
7. Summary, Findings and Suggestions 364

PREFACE ----------------------
There is this dialogue between an optimist and a pessimist. The optimist IS just back, fresh from an intensive course on economic projections for India's economic growth. He has been taught by the pundits about BRIes, the demographic dividend, exports resilience, industrialists' confidence and assertiveness, increases in productivity and efficiency and the benign impact of international competition on the Indian economy. The instructors have all sought to outdo each other in their growth projections for India. Numbers like seven, eight and even ten are being bandied around. The optimist says breathlessly to the pessimist, 'Isn't wonderful that this is the best of all possible conditions for our economy?' to which the pessimist says solemnly, 'Yes, I am afraid, you are right my friend!'

This dialogue on India's GOP growth performance is quite well known. Many economists, induding those whose job is to showcase the economy to foreign investors, have repeatedly pointed out that India has been one of the fastest growing economies in the world, and that too over a twenty-four year period.

In a country like India where more than 60 per cent of its population directly or indirectly is dependant on the agricultural sector for their income, the importance of the growth of this sector need not be over emphasized. The Prime Minster Dr. Marunohan Singh said that the 8.00 per cent growth target of Tenth Five Year Plan could not be achieved. The mid-term appraisal shows that the performance of the economy was well below the target, averaging 6.50 per cent in the last three years.

One of the major reasons of this low growth is the decelerated agricultural growth rate after the mid 90's. Agriculture had grown at 3.20 per cent from 1980-1996 and decelerated to 2.10 per cent during the Ninth Plan. The corner stone of the 10th plan strategy was a reversal of the declining trend in the growth rate of agriculture and the target for agricultural growth was set at 4.00 per cent. But the actual performance of agriculture appears to have deteriorated further and will not possibly exceed 1.50 per cent per annum during the first three years of the Tenth Plan.

Although India is ex!-,orting many commodities because of overproduction and Sugar is one of them and which is produced from Sugar-Cane. India's GOP at present growing slowly but not to the extent it should increase. This may be due to poor Industries Growth Rate. One of the reasons for slow IGR may be higher Transaction Cost.

If Transaction Cost is lowered it will increase IGR and consequently it will have effect on growth rate of GOP. I have chosen my subject II Analysis of Transaction Cost in Sugar Industry" for this reason. Sugar Industry made huge progress during 1930-1931 to 2001-2002. Even before India achieved independence Government has kept controls on this industry but controlling this many Cooperative Sugar Mills, Private and Public Mills were set-up which is 426. For the progress of Sugar Industry, Government had set up many committees with different terms of reference. One such committee was under the chairmanship of Mr. S.N.Gundu Rao, which went into the problem of obsolence of modernisation and rehabilitation of the Sugar Industry. In the year 1964 Dr. S.R.Sen committee was set up to go irlto the ex-factory price of sugar. Mr. B.B.Mahajan committee went into all types of problems of the industry and ·came out with various recommendations for growth. Our government accepted many recommendations and it helped industry greatly.

The average area under Sugar-Cane has gone up from 1176 thousand hectare to 4076 thousand hectare, the yield has gone up from 30.9 tonnes to 72.56 tonnes, the number of factories has gone up from 29 to 426 and the total sugar production has gone up from 12,000 tonnes to 18711000 tonnes. The percentage of recovery has gone up from 8.96% to 9.9% and production of molasses has increased from 336 tonnes to 5607 tonnes during this period.

Individuals, authors, associates and institutions at national or international level have done many research works on different problems and financial aspects of the industry. Several studies in Productivity, Profitability, Export-Import Policy or Liquidity Trend, Sugar by-products performance etc. were also studied. But no research work has been concluded on performance and analysis of Transaction Cost of Sugar Industry. Hence, for the first time I have tried to emphasize on "Analysis of Transaction Cost in Sugar Industry" and its relationship with financial performance particularly in profitability of sugar mills. The purpose of this study was to find out the role of Transformation Cost and Transaction Cost in Sugar Industry and to examine the impact of Transaction Cost on profitability of Sugar Industry or not. The sugar mills have been selected on the following grounds:

1. Only private sugar mills have been selected based on :

• In this Industry Government control was very high in inputs wise and output wise.
• Industry is facing problem of sickness.
• Sugar Industry plays major role in Indian Economy and also development of the country.
• Transaction Cost was very high.
• The only way to increase profitability is to reduce Transaction Cost.

2. Therefore, I have selected 25 Private Sugar Mills listed on Bombay Stock Exchange out of 88 Private Sugar Mills for the study as a sample, which were continuously producing sugar during last six year.

My main purpose is to determine Transformation Cost and Transaction Cost that affects the profitability of Sugar Industry. In this industry, Government has fixed the minimum price for raw materials and maximum price of sugar. Government fix input -output prices so that only way for the Sugar Industry to increase growth rate and to reduce Transaction Cost which could be done by some sugar mills. Analysis of cost structure and financial performance has been done for overall industry as well as individual 25 selected private sugar mills by adopting various techniques suc.h as ratio analysis, standard deviation, average, co-variance, coefficient etc. and through statistical tools, I found-some conclusions related to cost structure and profitability.

Sugar Industry would have made huge progress but its progress was hampered by many problems like shortage of cane, corruption, delay in the payment of sugar price, high cost structure, over stocking of sugar, fixation of sugar price etc.

In this study, I have selected various ratios related to Profitability, Growth, Inventories, Leverages, Transaction Cost and Transformation Cost etc. and also used various statistical tools like /I ANOVA" test, Kruskal Wallis one-way analysis of variance test and one-way T-Test. The research shows that growth trends of selected private sugar mills, trend of global comparisons, production and crushing capacity, hopefully conclusions and findings and suggestions of practical significance would have operational utility for government, management, investors, creditors, employees, etc.

The data has been collected fr~m the published annual reports and accounts of the selected private sugar mills from the year 1994- 95 to 1999-2000 and from stock exchange official directory. To supplement this data various publications regarding Sugar Industry published by Indian sugar journal, World Sugar Directory, Individual Sugar Mills, PROWESS database of CMIE and Capital 2000 were also used.

I have tried to explore the intricacies of the topic with my insight into the subject. Research, as it is a continuous process, always goes on and opens up new avenues for further research. I hope, my work would be of some utility and significance for the new researchers to come. I also wish that some other young minds will carryon the research on the topic form where I have left.


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