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CAG,Credit and Credibility

It is not just the govt and its policies that are on mat,even CAG’s credibility is at stake.

Written by Surjit S Bhalla |
August 22, 2012 2:47:50 am

The Comptroller and Auditor General of India (CAG) has tabled “accounting” reports in Parliament,and blamed the government of India,and Prime Minister Manmohan Singh,for condoning and encouraging corruption to the tune of several trillion rupees. But its “accounting” has justifiably raised the question: Who would you trust more,the CAG or Manmohan Singh? Those opting for the former,but still believing in a false objectivity,conclude: in the end,despite the warts and faults,we,the citizens of India,would end up thanking the CAG for doing much more good than bad. This article is about the documentation of two firm conclusions: I trust the CAG a lot less than the PM. It is a case of not that I trust Manmohan Singh,but that I trust the CAG even less. Second,what the CAG has achieved,by consistently playing to the base galleries (and the opposition parties?),is to lose a considerable amount of credibility. Hence,the second conclusion of the CAG being more good than bad is naïve,and misplaced.

When the CAG first came out with its draft report on Coalgate,it claimed that the government had lost Rs 10.7 trillion — one lakh crore is equal to one trillion,and one trillion rupees is approximately equal to $20 billion; so

Rs 10.7 trillion is equal to $214 billion. When it was pointed out that this number exceeded the total income and corporate tax collection,the CAG hastily clarified — the benefits accrued over 25 years,not one year. But then should the benefits not be discounted?

Credibility in question — 1: The draft CAG report on coal (the one leaked to friendly TRP channels) was completed in April. This draft report,as is the final report tabled last week,pertains to allocations of coal reserves made to private and public sector firms,circa 2006. The corruption loss was estimated by the CAG to be Rs 10.7 trillion,of which the private sector share was 47 per cent,or Rs 5 trillion. In the latest report,this estimate of private sector corruption loss has been reduced to Rs 1.87 trillion,or by two-thirds.

Credibility in question — 2: How does one explain a two-thirds reduction in an estimate made by ostensibly the premier accounting agency in India (some senior officials at CAG believe that it is the accounting firm in the world) in a space of three months for something that happened more than five years ago? If one cannot foretell the past,then what forecasts can one make of the future?

Credibility in question — 3: Both the above calculations are in 2010-11 prices,but the so-called sweetheart deals were made well before the explosion in commodity prices post-2006. If tomorrow the international price of coal falls,then will the CAG come out with a reduced corruption estimate? Hopefully not — but what one does hope is that the CAG stick to fair practices in its assessment of unfair practices by firms,and governments. If the price of coal allocations is based on the year of allocation,then there is a 41 per cent decline (from Rs 10.7 trillion to Rs 6.3 trillion). So,the new estimate of Rs 1.87 trillion should actually be Rs 1.1 trillion.

Credibility in question — 4: Strangely,perhaps mysteriously,the CAG does not discount the benefits from Coalgate,even though it adamantly insists (and rightly so!) that the benefits will accrue over 25 years. Even more mysteriously,the CAG does use discounting to evaluate the scam losses from Reliance Power and Delhi International Airport (P) Limited (DIAL). In both cases,the CAG estimate of the discount rate is 10 per cent. Using the same discount rate,and over 25 years,the Rs 1.1 trillion figure reduces to just Rs 44,000 crore.

Credibility in question — 5: In these troubled deficit times,everyone is concerned about the loss to the exchequer. But Rs 44,000 crore is not the loss to the government or the taxpayer. The corporate tax rate is 30 per cent,so Rs 13,200 crore accrues to us. Net “corruption loss” from Coalgate,therefore,is Rs 30,800 crore.

Credibility in question — 6: Using the CAG estimates of allocations to both private and public sectors in coal,the actual loss is close to Rs 0.64 trillion. The initial estimate of Rs 10.7 trillion yields a truth to falsehoods ratio of only 6 per cent.

Credibility in question — 7: The figure for corruption in DIAL is loudly proclaimed to be Rs 1.6 trillion. But almost half accrues to the government. Page 17 of the CAG report on DIAL claims that “the share of DIAL would amount to Rs 88,337 crore,net present value of which is Rs 4,187 crore”. Ratio of truth to falsehoods a paltry 4.7 per cent.

Credibility in question — 8: “Illegal” benefits to Reliance Power is estimated by CAG to be Rs 29,000 crore. As of date,the market capitalisation of this company is Rs 25,000 crore.

Credibility in question — 9: Recently,the CAG tabled a report in Parliament that there was a shortfall in the higher education budget of Rs 1.16 trillion in 2009-10. In its zeal that no “corruption” number less than Rs 1 trillion is worthy of the CAG stamp of disapproval,the scam-busting organisation failed to do some elementary calculations. For example,that the amount lost was more than seven times the budget for that year! How did this happen? Because the CAG,apparently “mistakenly”,confused lakhs with crores — that is,a ratio of truth to falsehoods of only 1 per cent.

Credibility in question — 10: Remember the 2G scam which started the infiltration of the CAG into creative accounting? For that scam,the CAG estimated that Rs 1.76 trillion was given away to the chosen few; the actual number was about Rs 40,000 crore,as obtained from resales by the chosen to the market — a truth to falsehoods ratio of nearly 23 per cent.

Collecting all the results,the truth to falsehoods ratio (TFR) is considerably less than 10 per cent. I conducted a small survey among concerned citizens and quasi experts on the subject of the TFR level at which one begins to lose credibility — most estimates centred around 20 per cent. A ratio of 6 per cent defies imagination,and truth. How does one explain such large falsehoods emanating from an ostensibly truth-serum factory — a factory that has excellent public relations,especially with the knee-jerk opposition? So good is the PR that even respected journalists and publications are in its snare — so much so,that some of them entitle their reports as “In Vinod,we trust”. (Vinod stands for the tallest CAG member,Vinod Rai.) Is it an attempt to justify expenditure for a 58,000-employee-strong empire?

A quick perusal of newspaper reports on the CAG has most of them questioning the logic,and math,of the CAG. Why does the CAG make such grotesque miscalculations? Why is it allowed to make such errors? Losing credibility is almost terminal for a firm,or brand,or an institution. Time to do an original CAG on the new CAG?

The writer is chairman,Oxus Investments,an emerging market advisory firm. Visit thirdpartyofindia.org for an open forum on India’s politics

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