Are the latest figures of 3.8 lakh crores given by CAG credible?

As Surjit Bhalla in his column in Financial Express pointed out,”The total corporate taxes collection between 2004-09 averaged around 1.2 lakh crores“.

This 1.2 figure is across all sectors of the economy. CAG is suggesting that just one sector, i.e. Coal Sector can yield 1.86 lakh crores. Therefore, the above figures seem to be hugely exaggerated if not absurd.

But the same CAG gave 1.76 lakhs crores figure given in 2G?

This is misleading. CAG never said that the losses were 1.76 crores. CAG rather gave three estimates; each figure was calculated based on different assumptions. 1.76 lakh crores was the highest figure amongst those three assumptions. By regularly repeating the 1.76 figure again and again in the last 2 yrs by the media, opposition and civil society groups, it has become a commonly accepted truth that this was actually the loss.

Most independent non-CAG estimates were around Rs 35,000 crores. Valuations depend hugely on the assumptions taken.

How can assumptions change the valuations?

Valuations or estimating the future earning of a company is not an easy concept. Valuations deeply depend on the assumptions made.

We can take simple analogy of the stock markets. If every analyst made the same assumptions, there wouldn’t be any buyers or sellers. This is because everyone would come to the same conclusions. For e.g. some expects stocks to rise while others expect it to fall, it is because of different assumptions that we have a markets.

Anyone can use a different set of assumptions to show that the loss figures were 10 lakh crores or as Kapil Sibal claimed zero loss. Key thing is whether the assumptions have been reasonable or they have been unreasonable.

What is an unreasonable assumption?

In 2008 when the 2G scam happened, the spectrum was sold at 2001 prices. The number of mobile users had increased manifold since 2001 and should have been reflected in the pricing. This is an unreasonable assumption by the Government.

Likewise, the CAG report in 2G and CoalGate suggests that auction is the best method for allocating the natural resources. Comparing auction and non-auction figures is an unreasonable assumption as auction may not be the best method.

Why auctions may not be the best method of allocation?

In 2010, Government auctioned the 3G spectrum and earned huge amounts of money. Presently, the state of 3G penetration in India is not too high even after two years. Almost all telecom companies are severely loaded with huge debts as a result of huge spectrum costs.

In contrast in 1999, the mobile call charges were high (around Rs 7 per minute), but dropped significantly by 2001 and have dropped even further after that. This was done because the then Government felt that Telecom is a strategic sector and extremely important for development. Thus came the ‘first come first serve‘ policy.

Today telecom penetration has improved substantially and it has played a crucial role in development as well. Vajpayee started Kisan Call Centre during his term. Today it provides answers to farmer’s queries in multiple languages. Similarly, the Chattisgarh PDS system uses bulk SMSes. There are several such examples.

None of this would have been possible without low call charges enabling greater telecom penetration. Who knows what’s there in future. Five years down the line, we might have even lower cost mobiles and tablets available which may enable the Government in delivering services like Health, Education, etc through 2G and 3G technologies much more efficient at lower costs.

Likewise, auctioning of Coal would have meant higher electricity costs which would have to be borne by all of us as also the industry. Already our power sector is facing huge issues.

The policy decision on how to deal with country’s natural resources is to be decided by the Government which is free to decide. Such decisions should be ideally based on which option is in the long term interests of the nation. Hypothetically, an elected Government may even choose to give away these resources for free.

Why can a Government sell its natural resources at a loss?

This is the right of every elected Government. Government already does that. For e.g., cheap land and tax exemptions are given to industrialists to invest. Usually such benefits come with riders like providing jobs to the people of the area.

Government also sells petrol and fertilizers at a loss. The key thing is not necessarily the loss or the quantum of loss, but “whether there have been any procedural irregularities or not

What are procedural irregularities?

It essentially means arbitrariness. If the Government does not follow its stated policy and provides benefits only certain individuals/corporates, it can be called a procedural irregularity. A policy where benefit is provided to all like giving fertilizer subsidy to all farmers cannot be termed as an irregularity.

Has CAG pointed out any procedural lapses in these corruption cases?

Yes, plenty of them. Unfortunately, this is something that hardly anyone has focused. The focus has been on the quantum of losses. Some of the violations are mentioned below:

2 G Scam violations –

  • Dates of the spectrum applications were arbitrarily changed.
  • One of the allotees submitted a DD for 50 crores on Jan 10th, 2008. The DD was drawn on the Punjab National Bank of Mumbai reached Delhi from Mumbai on same day. This was suspicious because the Letter of Intent was given only in the afternoon of the same day
  • Spectrum was allocated to some companies which had nothing to do with Telecom sector. Such companies sold their spectrum at a much higher price.

Coal Scam violations –

  • A Minister wrote to the Prime Minister seeking his “personal intervention” in getting blocks allotted to a company allegedly run by his brother.
  • One allottee is an Ayurveda company. Basis on which an Ayurveda company was considered eligible to run a captive coal-block is left to your imagination. (Source)

UMPP Scam violations – Prima facie, UMPP appears to be an open and shut case.

  • As per the UMPP policy, coal blocks were to be given to the corporate free of costs. There would be an open bidding process. The company that bids for the lowest electricity tariff would be given the contract.
  • After the bidding process, the rules were changed. Reliance power was allowed divert coal to its other power plants (non-UMPP). These plants were not bound by the UMPP tarrifs and thus Reliance Power was a direct beneficiary.
  • Tata Power which lost the bid has already filed a case. This is a clear case of arbitrariness.

But this policy was followed by the NDA?

This is actually true. In 2G case, the first come first serve policy was started by NDA. However, even Supreme Court has ruled that the policy is fine, it is the implementation that is faulty. In Coal scam, the policy dates back to 1993, when it was Congress dispensation headed by Narasimha Rao.

The key point is that till date, no irregularities in allocations during NDA have been brought forward.

Has CAG overstepped its authority?

CAG is an auditor and its focus should ideally be on the irregularities. Policy formulation is solely the domain of the election Government. Suggesting that auction based allocations could bring in more money is therefore somewhat wrong and CAG must avoid it.

Are reforms the solution?

India has one of the highest coal reserves in the world. Yet it imports nearly 20% of its coal. This figure has consistently increased over the last few years; imports were barely 5% in 2000. Without coal, our energy sector and power woes cannot be solved.

India’s coal sector was nationalized in 70s by Indira Gandhi and Coal India is extremely inefficient which is why more competition is needed. Coal Mines Amendment Bill has been pending since 2000 in the Rajya Sabha. It could not be passed because then Government did not have a majority in the Rajya Sabha.

Quite expectedly, no attention will be paid as to who was the Leader of Opposition in the Rajya Sabha in 2000, did he oppose or support the coal reform, did he oppose or support the other reforms like in insurance by the NDA, such questions don’t matter. He shall eternally remain an eminent economist and our reformist PM.

Why should PM resign? Why not Modi as well?

This is an argument being made by some Congress ministers and is a perfectly valid argument. In CoalGate, the ministry was headed directly by PM and there have been several irregularities. In case of Modi, there have been some CAG reports indicting the Modi Government. However, no irregularities have been point out till now.

If the CAG had not given such figures, would the investigations at such pace be conducted in 2G?

Most probably the answer is NO. This is a perfectly logical question to be raised and possibly the only valid justification of the otherwise absurd figures given out by CAG.

Have the figures given out by CAG done any damage?

These figures have created a myth – a myth that these figures are actually true, a myth that reforms are not important. A myth that India can just auction its resources and it will be on its way to prosperity. Media and civil society groups in particular have contributed in creating this myth.

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Sandeep is an IT services consultant, currently based out of North India. He holds Libertarian views and is deeply interested in Economics, Politics, Indian History, Defense and Geo-politics. He also tracks the Stock Markets and Pakistani politics. He has been greatly influenced by Arun Shourie, Ambedkar and Chanakya.

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