What will CAG audit next? Public toilets? Why SC decision on telcos is wrong

The Supreme Court’s order enabling the Comptroller and Auditor General (CAG) of India to audit the books of telecom companies is an unnecessary extension of the tentacles of the state that can only lead to damage, delay and distortion in the relationship between government and India Inc. Worse, it will provide yet another avenue for graft and corruption.

In theory, the court’s decision sounds logical since scarce natural resources and government revenues are involved. A bench, with Justices KS Radhakrishnan and Vikramjit Sen, had this to say in its judgment yesterday (17 April): “We are of the considered view that when the executive deals with natural resources, like spectrum, which belongs to the people of this country, Parliament should know how the nation’s wealth has been dealt with by the executive and even by the UAS (unified access service) licence holders and the quantum of the revenue generated out of the use of the spectrum and whether the same has been properly assessed, collected and accounted for by the Union and the UAS licence holders.” (Italics author’s)

The judgment further said that “when nation’s wealth, like spectrum, is beingdealt with either by the Union, state or its instrumentalities, or even the private parties, like service providers, they are accountable to the people and to Parliament. Parliamentary democracy also envisages, inter alia, the accountability of the council of ministers to the legislature.”

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The ramifications of this judgment will be felt not just in the telecom business, but almost all spheres of industry, services and trade. In theory, the government’s accountants can thus be let loose on scores on companies involved in activities ranging from mining to energy production to road building to running private ports and airports.

If, the court’s order is taken to its logical conclusion, it could even be extended to the auditing of public toilets and roadside hawkers. After all, both public toilets and hawkers consume public spaces, and any earnings/expenditures incurred in the process of creating public toilets or hawking zones is, by virtue of this judgment, the business of the state. Even taxpayers can in future be audited by CAG, since the idea is to make sure the nation gets its share of revenues.

Thanks to the 2G, Coalgate and other scams, and Arvind Kejriwal’s suspicion that Delhi’s power distribution companies are overcharging customers, the CAG is auditing not only telecom, but power and airport companies, apart from gas producers. Now, of course, everyone is fair game.

There are five reasons why the government must tell the Supreme Court to back off.

First, governments are elected to decide how to allocate scarce public resources through effectively policy making. If they have not done a good job of it, or set processes have been subverted to favour some people, the courts are entitled to step in. However, it is not the job of government to audit every single entity it does business with. This is not only physically impossible to implement, but the results thrown up by such CAG audits have the potential to stall business decisions and growth. Policy paralysis will then become endemic not only to the public sector, but the private sector as well. Which power company will take efficient decisions if every decision it takes will have to satisfy a government book-keeper, who may or may not know his business? Auditing a power companies’ books is not just about looking at the balance-sheet, which is anyway a public document, but the entire underlying business from which these numbers flow. It is not CAG’s business to get under every business.

Second, the judgment talks about resources that “belong to the people of this country” and “nation’s wealth.” In theory, this is fine, but in practice there is something called the right to private use. When a telecom company buys spectrum in an auction, the spectrum does not remain as public property for the period of the licence. It is quasi-private property. The same applies to gas reserves discovered by private parties, coal mines allotted to power producers, land allotted for building factories, or even land allotted for, say, low-cost housing. Once a government, through a transparent and clean process, decides to alienate a public resource, it cannot remain a public resource - except as defined in the contract between the state and the private party.

Only in a socialist state does a public property remain permanently public. In all other kinds of state, there has to be a separation between private and public property - and property owners ought not to be subject to intrusive audits by the state unless they are in obvious breach of licence or contractual conditions. And these relations ought to be relationships of trust. If there is no trust, the cost of doing business will escalate.

Third, there is the question of capacity. The CAG is meant to audit entities directly owned by the state. It simply does not have the ability, manpower or resources to audit hundreds of commercial firms whose reason for existence is something else. CAG can audit government companies because the owner has a stake in the audit. Mindlessly extending audits to private companies, in fact, will be in defiance of those companies’ owners’ wishes. This is undemocratic and unfair.

Fourth, India is already an over-regulated and undergoverned country. There are simply too many people with powers to block or delay or damage someone else’s business because the law decrees so. Whether it is the tax authorities, or the various market and industry regulators, or even customs and excise authorities, not to speak of state-level labour and environment watchdogs, business is simply hampered by excessive controls and meddling. This is a perfect playground for graft and corruption. CAG has, so far, been mercifully free from corruption and graft charges. By extending its scope to areas well beyond its competence, the Supreme Court has now made CAG the next frontier for corrupt practices.

Fifth, the court has talked of CAG audits not only where the state in involved, but even its “instrumentalities.” This means any quasi-state institution like, say, the LIC or Air India, if it enters into a deal with a private party, could technically be inflicted with a CAG audit. CAG is today a respected institution because its ambit is defined and specific. Once it is sent after all and sundry, it will lose its sheen. No institution can survive mindless expansion.

The Supreme Court’s verdict is a recipe for disaster. It will make doing business in India harder than ever. India is already close to the bottom of the pile when it comes to the ease of doing business, with a rank of 134 in a group of 189. It slipped three places last year. If the Supreme Court’s decision is extended to other areas, we will quickly move further down the rankings.

We might as well tell India Inc to emigrate.