Setting hounds on the watchdog


If the audit of the implementation of a policy brings to light deficiencies in the policy itself, the CAG has the right and the duty to raise questions

This article will not go into the detailed factual content of the Comptroller and Auditor General’s recent reports but will deal with some of the general points that figure in the fierce controversy now raging.

CAG’s mandate

The word ‘audit’ has not been defined in either the Constitution or in the CAG’s Act of 1971, and the word ‘accountability’ does not occur at all. We have so far been going by 150 years of history and tradition as well as current international practice. The Hon’ble Manish Tiwari, MP, ( The Indian Express, August 28, 2012) attaches no importance to them. Perhaps he thinks that the audit of the CAG in India today should be governed by a much narrower idea of executive accountability than that adopted by British Auditors General in the colonial period, or by the Supreme Audit Institutions (SAIs) in many countries today. In his view, the CAG should do no more than check whether expenditure has been authorised, vouched and accounted for. For an audit function so defined, there is hardly any need for a constitutional authority, much less one that swears an oath to “protect the Constitution and the laws”. Mr. Tiwari should therefore try and get the Constitution amended to delete the Articles that provide for a CAG (148 to 151). Until that happens, we have to go by existing provisions, history, tradition, and international practice.

Questioning policy?

There is no basis at all for Mr. Tiwari’s accusation that the CAG has formulated his own policy. He has only gone by policy prescriptions recommended internally at various levels within the government. Leaving that aside, and in general terms, is it appropriate for the CAG to question government policy? The answer is a clear no. Policymaking is the prerogative of the government. The CAG would readily assent to that statement. However, hypothetically speaking, if there is no clear record of a considered policy decision; or if in the making of policy the financial implications were not taken into account at all or wrongly estimated; or if the policy has the effect of conferring benefits on some individuals or groups to the exclusion of others; then these are matters on which the CAG has not merely the right but the duty to raise questions. Again, if the audit of the implementation of a policy brings to light deficiencies in the policy itself, the CAG must point this out. In some cases, the statement that “this is a matter of policy” is merely an ex post facto defence.

Allocations vs competitive bidding

The Prime Minister’s statement in Parliament deals with this at some length. It appears that the UPA did favour an auction procedure but was unable to implement it for various reasons. This does not invalidate the point that such a procedure would have been the better course; it merely argues that the delay in adopting that route was unavoidable and therefore not blameworthy. This explanation will no doubt be put forward by the government before the Public Accounts Committee when it takes up this report. However, the Prime Minister’s statement also says that some State governments argued that auctions would have resulted in an increase in coal prices and therefore in the cost of electric power. This is a clear admission that under an auction procedure the revenues to the government would have been more. If so, the non-adoption of the auction procedure implied a subsidisation of the recipients of the allocations, and if so, was there not an element of discretionary patronage with its attendant risks?

Notional or presumptive loss

There is a dilemma here. If the report were to make a bland statement that an alternative procedure would have yielded more revenues to the government, or would have meant less discretionary patronage, that would give no indication of the financial dimensions of the decision or the importance of the matter. Putting a number on it brings this home. On the other hand, when a number is mentioned, the discussion tends to focus on it and not on the issues involved. There is no easy way out of that dilemma. All that one can say is that the ‘notional’ number should be carefully estimated, making the assumptions and methodology clear. That is what the audit reports do. They do not claim that their figures are definitive. The assumptions can be questioned; the methodology can be questioned; the resulting number can be questioned; what cannot be questioned is the procedural or substantive lapse to which the figure points.

Surjeet Bhalla ( The Indian Express, August 22, 2012) thinks that future streams of revenues or profits should have been discounted to net present value (NPV). This has been echoed by others. This is a fallacy. NPV calculations are relevant for comparing future benefit streams with present costs, not for comparing future with alternative future. The two futures can both be taken at current prices or at constant prices. Alternatively, instead of aggregating future flows, we can compare the two cases in terms of potential annual flows. In other words, instead of saying that the potential revenues forgone or benefits conferred will amount (hypothetically) to say, Rs10,000 crore over a 10-year period, we can say that there is a recurring annual revenue sacrifice or benefit-conferment of Rs1,000 crore. In either case, no discounting to present value is called for. Further, let us assume that future flows are discounted to NPV and that gives us a figure of Rs 40,000 crore instead of Rs1.8 lakh crore. Is that a low figure? Does it reduce the unacceptability of the arbitrary decision-making? What matters is not the number but the procedural lapse or governance failure that it points to. Pratap Bhanu Mehta makes this point persuasively in his article in The Indian Express on August 20, 2012. > The Hindu editorial of the same date also stresses the significance of the audit reports.

Mr. Bhalla argues that windfall gains to a private company should be offset by the taxes payable to the government. This implies that flawed decision-making is of no consequence because some of the benefits improperly conferred on particular parties will come back to the government by way of taxes. Unfortunately a similar point occurs in the Prime Minister’s statement.

To Mr. Bhalla the substantial reduction of a large notional loss figure initially mentioned in the light of the explanations given by the government is an indication of how wrong the earlier figure was, and not evidence of openness of mind and a willingness to give due consideration to the points put forward. This makes nonsense of the entire procedure of exchange of drafts and comments. Not only is the figure put on the objection reduced in the light of comments and explanations, but quite often, the tentative objection itself is often dropped. This is a well-established procedure. Changes, even drastic changes, are inevitable in this process. This is a sign of procedural soundness and fairness.

May one add that throughout Mr. Bhalla’s article there is a superciliousness, scornfulness and abusiveness which one finds deeply offensive. One wonders what drives this real or simulated anger.

The Finance Minister argues that the coal blocks have not yet gone into operation, and so the question of profit or loss does not arise. This is a non sequitur. At the time of decision-making on allocations it has to be assumed that the recipients will make use of the allocations, and a decision has to be made on that basis. The fact that there could be delays in that use in some cases cannot be foreseen at that stage. In fact, if augmentation of energy generation is the objective, and if there are serious delays in the utilisation of coal block allocations, the question would arise whether the recipient’s intention was merely to block some mines pre-emptively. That would show up the decision-making in even poorer light. In any case, the proper course, as pointed out by some in the Opposition and Left parties, would be to cancel the unutilised allocations and invite fresh bids.

The concerted campaign to discredit a constitutional functionary is very disturbing. This article has been written in the hope that it will provide a proper perspective for the ongoing debate.

(Ramaswamy R. Iyer is a former Secretary, Water Resources, Government of India.)

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