Republic of Lootistan: CAG, and the face of 'crony capitalism'

In the late 1980s, when VP Singh was campaigning against Rajiv Gandhi on an anti-corruption platform, he would frequently invoke an earthy metaphor to highlight the fact that the Congress government had covered all the bases of monumental corruption.

Most of the scams of those times related to defence deals in which bribes were paid: there was of course, the celebrated Bofors kickback case, but there were also two other lesser-known defence scandals. One of them related to the purchase of HDW submarines in which Rs 20 crore (a measly sum by today’s standards) was paid as “commissions”; the other related to the purchase of 21 helicopters from Westland by the public sector Pawan Hans Corporation, evidently under Rajiv Gandhi’s influence. After a string of technical faults and crashes, the helicopters were discarded as junk.

[caption id=“attachment_375480” align=“alignright” width=“380”]  Welcome to the capital of ‘crony capitalism’.[/caption]

In the 1989 election campaign, VP Singh strung these scandals together in masterly fashion. On the stump, he would regale crowds with stories of how under the Rajiv Gandhi government, there were defence scandals everywhere - on land (Bofors), beneath the sea (HDW submarines) and in the air (Westland helicopters).

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The reports of the Comptroller & Auditor-General that were made public on Friday similarly show up all-pervasive sweetheart deals with private entities - on land (power companies), underground (coal block allocation) and in the air (Delhi airport privatisation). Not everything about these deals, of course, amounts to a scam, but each of them has the seed of a scandal embedded in it. That is the bigger takeaway from the CAG report, rather than the headline number in terms of notional loss to the exchequer, mind-numbing though the latter may be.

As with the 2G scam, where the Supreme Court cancelled 122 telecom licences issued by A Raja, the latest CAG reports unmask the face of ‘crony capitalism’ at its worst, where land and other national resources were given away to private entities at valuations that led to losses to the exchequer and amounted to unjust enrichment on the private entities’ part.

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According to the CAG’s estimation, the combined notional loss to the exchequer from these ‘sweetheart deals’ in the power, coal and airport deals amounts to a staggering Rs 3.8 lakh crore. So benumbed have we become to these numbers - each more scandalous than the previous one - that they no longer make any sense. But then again, the headline number ought not to be the biggest takeaway from the reports: the failure to abide by due processes and arrive at a price discovery mechanism in a transparent manner is by far the bigger point.

Predictably, the megaphones of the UPA have sought to dismiss the CAG’s reports by picking on the estimations of notional loss - or even the case that these were scams - by saying that the CAG’s valuations methodology was flawed since it abided by a ‘book-keeping’ approach to valuation of national resources.

These efforts echo Kapil Sibal’s infamous “zero-loss” theory, wherein he claimed that the CAG’s estimation of notional loss to the exchequer from the 2G spectrum allocation - of the order of Rs 1.76 lakh crore - was wrong, and that in fact there had been no loss at all.

But ironically, the very same UPA government effectively validated the Rs 1.76 lakh crore loss estimation - and debunked Sibal’s ‘zero loss’ theory - when it recently fixed the base price for 5 Megahertz of 2G spectrum at Rs 14,000 crore, which puts it at RS 2,800 crore/MHz, only marginally less than the CAG’s estimation of Rs 3,350 crore/MHz. Considering that this is only the base price, and the fact that the government could perhaps rake in twice as as much in the final bid, the CAG’s original estimation may have perhaps been a trifle too conservative.

Then, as now, it is the colossal failure to abide by due process - and a transparent procedure - in the allocation of national resources that has enabled such monumental corruption scandals to be perpetrated.

To that extent, the reflexive criticism from knee-jerk anti-reformists - that we should roll back any efforts to open up the economy - is flawed. The remedies to prevent scams of this nature are, if anything, in the opposite direction: in undertaking greater and deeper reforms, including administrative reforms, and doing away with Ministerial discretion in the allocation of national resources, and putting transparent mechanisms in place for price discovery - if necessary by bringing in the regulator and the auditor-general at an earlier stage of the decision-making process.

The CAG’s reports do point to a very flawed process in the way government and private businesses interact. But it’s important to draw the right lessons from the problems that the CAG reports highlight. By shutting its eyes to these lessons, and by debunking the CAG’s reports. the government is throwing the baby out with the bathwater. As with the 2G telecom mess, that way lies only yet more shame and scandal.