Saturday, March 24, 2012

Scam Gates that Lead to Nowhere!

Let me begin with a caveat... I can’t stand this Government, headed by Dr Man Mohan Singh, anymore!  I believe that it has lost all the credibility to continue and is only clinging to the power!  I would love to see this Government replaced with any other functioning government, at the earliest.

Having said that let me come to the subject of this post.   It is about the numerous issues being brought out in the name of scams and gates, latest being the so called scam of coal mine allocation, otherwise popularised by the social media  as Coalgate!

When I try to correlate the above two paragraphs, I am reminded of the story of a mother-in-law, who wanted to see her daughter- in-law’s tears even at the cost of her own son’s death!  While many of us would like to see this Government packing up at the earliest (though, each of us might be wishing so, for different reasons), we can’t afford to be that mother-in-law, and let our Nation suffer in the long run.

I am as worried as anybody else about these gates that are appearing more frequently in our national and regional landscape.  But, for the purpose of this post, I would restrict myself to the national scene.  Where are these gates leading us to? Are these gates only for ouster of the present government or are they taking the nation to unknown territories?

Our Constitution envisages a fine balancing of different arms of the State - Executive, Judiciary and Legislature.  Government, being the Executive, has lost the credibility due to various actions and inactions.  But can that be a reason to allow other arms to gain upper hand and in the process upset the constitutional balance?

We have seen the increasing activism of Judiciary, with government looking helpless in front of various Benches that pull them up, to the happiness of headlines writers in the Media, during any stage of the hearing. 

Look at the 2G verdict.  Government of the day clearly understands the danger in making auction the only legal method for allocation of natural resources.  Even otherwise, allocation and utilisation of natural resources must be the policy of Executive.  Yet, government is not even sure of filing a review petition to challenge the Order that makes first come first serve policy illegal and unconstitutional! Government is worried about public perception because it knows that people hold it guilty for 2G scam (rightly or wrongly) and any effort to challenge the verdict that calls for cancellation of tainted licenses will be seen as an effort to side with corruption!  This is what lack of credibility does to governance! 

While this indecision and innuendos are still going on, there comes another jolt.  This time, it was leaking of a draft report of CAG’s performance audit on allocation of coal blocks.  Anyone who has dealt with auditors in their official capacity knows very well, as to how preposterous their preliminary observations can be at times.  Their objective is to establish wrong doings and aberrations and towards this end they don’t leave out any chances.  However, fortunately, most of these preliminary observations get dropped during the replies and subsequent explanations, spread over considerable period of time. 

Final reports usually contain only reasonable observations that could not be resolved by the executive staff to the satisfaction of auditors.  However, CAG, which is supposed to conduct the audits and submit report there on, to the Parliament, is increasingly finding it tough to keep even their draft reports from reaching the Media.  Media, in turn, arrive at conclusions that allow them ‘breaking news’ and outrage based TRPs, irrespective of the fact that the CAG itself is yet to finalise its findings on the matter and the Parliament could accept or reject that very findings.

Let me not go into the details of the said draft report, already published in the Media extensively.  I will limit to the principle of auctions as the preferred mode for allocation of natural resources, as advocated by CAG in 2G as well as Coal allocation (though yet to be finalised).

Is CAG or even Supreme Court competent to dictate the mode of allocation of natural resources to a Government? In my humble opinion they are not. It is the legislature and/or executive that must decide its allocation or exploitation. 

CAG should limit itself to ensuring that there were no misdeeds in following the stipulated policy.  It can also suggest any alternative methods that are more efficient within the stipulated policy or even recommend a change in the policy itself.  But to report that a policy itself is wrong and then to suggest that all actions undertaken by Executive within that policy is corruption is definitely beyond the scheme of things.  Otherwise, why do we need a legislature and executive? Let CAG make policies and bureaucracy govern the nation!

Is auction the panacea for all ills?  Can auctions be limited to certain resources alone? Or, would it be the policy for each and every resource controlled by the government? For example, if I don’t get a berth in a train or a seat in Air India, can I file a PIL and seek auctioning of those berths/seats to the highest bidders?  If there are no sufficient beds in a government hospital, should the doctors auction them to the highest bidders? Water being a similar natural resource, should we allow people to exploit it as they wish or should Government sell it to the highest bidders?  To take it further, if you are waiting for a taxi and I come and offer more money to the driver, whom should he accept as the passenger?  I would not even dare to take these further to licensing of oxygen supply against payments.

You might find the above suggestions preposterous.  But the logic is same as 2G and Coal allocations.  What starts with them today can extend to all those scenarios tomorrow. We will have the perfect capitalist system where highest bidder gets all the rights to any assets!

We all know tender system is another form of auctions, used by government in allocating public works.  What is the result?  Pot bellied contractors and potholed roads?  Has tender system been able to remove corruption or syndication in construction contracts?

The logic of CAG seems to be simple. If an allocation is made other than through auctions, whatever profit made by the allottee amounts to loss made by the government on account of that allocation and therefore it is corruption.  Even though, CAG himself dissociated from this view in his letter to Prime Minister, going by the recent past we can safely conclude that the final report will also reflect this view. 

In my opinion this view of CAG (and of Supreme Court in 2G) is incorrect. Let me demonstrate.  First of all, why is that such a resource is allocated to private parties under licence or permits? Why it is that Government itself is not exploiting these resources?  As per my understanding, Government neither has the capital nor the expertise to undertake such ventures.  Government can spend tax payers’ money and undertake these ventures despite lack of expertise, but then we have seen that whenever such things are done, they end up in making colossal losses.  Closest examples are the number of loss making PSUs including Air India, where budget allocations have to be pumped in again and again to keep them afloat.

We have opted for a mixed economy where public and private sectors coexisted.  With liberalisation, the emphasis got shifted more towards private economy, Government’s role being limited to regulator and facilitator.  At least this was the stated objective of liberalisation, though for various reasons the quota license raj continues to be in existence, in many sectors!

 Is private economy bad? Not, at all.  The very nature of human beings and their rational and/or selfish motives makes any public enterprise inefficient.  Unless, there is profit for the persons involved, the efficiency suffers.  Compare the efficiency level of government servants and private sector employees and you will realise this truth.  When a private person employs capital, it is his money, or money for which he is personally accountable.  He cannot afford to make losses.  Therefore, he will employ the best available resources and make all efforts to succeed.

This is the reason we cannot ignore private capital, if we are to progress at faster speeds.  Look at the effect of all reform measures on our growth rate and it becomes clear that private capital is an unavoidable element for our growth. 

Now, why should private parties employ their capital in such activities? Obviously, it is for profits.  If they are sure that the profits from the enterprise will not be sufficient to cover their opportunity costs of their capital employed elsewhere, they will not undertake that enterprise.  If the proposed enterprise involves risk, they will only undertake the same if they are assured of compensating profits. 

This being the case, how can we logically expect the private parties to pay license fees or auction amounts equivalent to the entire profits expected out of the venture? They are not in this for charity!  When they get the license, they hire and employ expertise, provide management skills and try to make the enterprise a success. They also bear the losses if it eventually fails. 

Look at the example of King Fisher.  If it was a huge commercial success, CAG and many others would have faulted Government for allowing a private player into a sector which was previously reserved for a public carrier.  Probably CAG would have come up with another performance audit which would have stated how many crores (with all those zeros) Government lost by not auctioning the airlines license and airspace! Today, with King Fisher making losses we are all cutting jokes at the entrepreneurs and in no way want our Government to do anything to save that company!  What is this, if not double standards?

Coal fields were never auctioned in Independent India.  Government itself was seized of the necessity to find alternate methods of allocation and the Bill for the same has been pending for many years now (like many other legislative proposals... but that is another story).  To arbitrarily take a period and then say Government of that period lost so much money by not auctioning the coal fields is not in good taste!  Would CAG conduct a study as to how much money was lost since independence on this account and how much blame is to be apportioned on to CAG itself for not being able to point out this fault earlier? After all CAG didn’t come into existence in 2004!

Can revenues or profits alone be made the yardstick of all decisions? By that logic, would CAG or some future bench of Supreme Court hold the Bench that decided the Vodafone Capital Gain Tax case against Income Tax authorities, corrupt, because its decisions caused a loss of revenue to the tune of USD 2.1 Billion to Government? More so, when at least the High Court found the reasons advanced by tax authorities sufficient to hold that the withholding tax was payable in India on that transaction!

By no means am I suggesting that any corruption should be condoned.  I am only stating that we should realise the difference between corruption and the need to revise policies in accordance with changing times.  Corruption involves criminality and corresponding standard of proof whereas, reforms of policies only require a felt need or advantage.

To conclude, I can only say one thing. Reforms in governance are not a destination but a continuous process. What is in vogue today might change tomorrow. We can even decide that we want to throw out private economy completely and stick to the erstwhile Soviet Model command economy for future.  But any change must not be brought by blaming the prior acts as criminal or corrupt. Such attempts will only increase the resistance to change.  Look at the reaction of current Minister for Coal on the leaked CAG report. He says, “I am coal Minister in UPA-2 and during this time no coal block has been given”.  In other words, he is using his inaction or inefficiency as a proper defence!

This is the true danger of such an approach.   No Minister and no bureaucrat would want to risk his career and reputation by taking any decisions that might be called into question in some future date on the basis of changed circumstances!   No work means no crime and no corruption. 

I won’t mind some corruption but we can’t definitely afford inaction!  Punish the corrupt but don’t encourage inaction!

PS: My thanks to @GuruMaata for triggering this post through a twitter debate on the subject. 


  1. Good points - Kingfisher is a case point!

  2. I'm awed by the brief concise arguments put forth here. I may not be aware of the nuances but certainly convinced that it's the change of policies which is the need of the hour!

  3. Whoa ! What post ! Unbelievable ..
    Corruption must go out of the system at any cost..the root of all scams/scandals..
    Have no idea about the nitty gritties of the policies stated here..but yes I agree that Something must be done so that there is no scope for scams and scandals in our country..
    I just want this meance of Corruption to be uprooted from your is eating up our Nation..Crores and crores of precious National money being exchanged in form of bribes by persons at the helm of affairs..When will all this come to an end..?

  4. I understand that auctions are obviously not an efficient way to go ahead for many resources. But most of those resources are in a way inhibited in some way or the other towards final usage. Rent seeking even on those resources are quite common (Railway TTs allotting extra berths, hospital beds divided into different categories and so on) and of course it leads to a compromise.

    For auctioning of national resources, the prime objective of the government is to obtain the best possible usage of the resources so as to give the maximum benefit to its citizens.

    When we have an allotment based system, and when the demand far exceeds the supply (more companies than resources), we end up with a situation where the office is in charge of allocation in a unique position. What essentially follows is a behind-the-scenes auction through nefarious deals for obtaining favorable allocation. Do we count that as a loss? How do we prevent such a situation through policy? Was such a prevention clause included in the policy? Shouldn't CAG question that? In a competitive private market, can we even prevent such a behind-the-scenes auction process? This auction price will obviously be recovered from the public through pricing.

    In an auction system, the policy determines the qualification of the bidders. Let us take the spectrum situation. The bidder knows that the TRAI regulates telecom prices. It knows the investments needed for exploiting the spectrum. Each bidder has a pool of information that is public (about TRAI) and private (about its efficacy). Using this information, a maximum price is arrived at for bidding. Rent seeking opportunities are reduced. A company suffering a loss under this situation has only itself to blame as it made an error in its judgements about the use of the spectrum.

    The bigger concern for me was the shady processes in which the allocations were done. Preponing of deadlines without notice, etc. which on the outside clearly links to possible behind-the-scenes dealing. And I as a citizen would like that to be investigated.

    1. There is no doubt that wrong doings, if any, need to be punished. But we should be able to differentiate between adoption of a specific policy and wrong doings in actually implementing it. The right of Executive to adopt specific policy should be beyond the purview of CAG or Courts, more so, in the case of hindsight.

      If there are suggestions for future it should be welcomed as suggestions alone and not as an indictment of the past policy.

      When we mix suggestions and indictments, it kills the initiative of public servants and we cannot afford that!