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Sukumar Mukhopadhyay: CAG versus PM: The fine print

If Parliament had debated the issue, the technical points would have been easily understood

Sukumar Mukhopadhyay 

Who is correct on whether private companies made windfall gains and the exchequer lost from coal block allocations: the Comptroller and Auditor General’s performance audit or Prime Minister Manmohan Singh’s rebuttal to it in Parliament? Given that the issue is rapidly acquiring political overtones, here is an apolitical explanation on some of the technical points.

Delays in introducing competitive bidding: The CAG’s thesis is that private parties who were allotted coal blocks without auction made windfall gains. This issue was raised by the coal secretary in July 2004, after meeting various stakeholders, in a note to the minister of state for coal and mines. The note recommended competitive bidding in coal block allotments on the grounds that “since there is a substantial difference between the price of coal supplied by Coal India and coal purchased through private mining, there is a windfall gain to the person who is allotted the captive blocks”.

The question, then, was whether competitive bidding could be introduced by administrative fiat or a law passed by Parliament. In June 2004, the law ministry had given an on the issue, which it confirmed in July and August 2006. The 2006 said: “It was open to the government to introduce the auctioning of coal mining blocks for captive use through competitive bidding.” The law ministry’s explained that the “selection process for allocation was possible by amending the existing administrative instruction and such a process could be governed by the provisions of the Indian Contract Act 1872”.

It did, however, provide a caveat: that a legislative amendment was needed “for placing the proposed process on a sound legal footing”. In his statement, the prime minister pointed out that in a September 2006 meeting the law secretary categorically said “it would be most appropriate to achieve the objective through [an] amendment in [the] Mines and Minerals (Development and Regulation) Act, 1957.” The prime minister said amending the Act took a long time due to “the complexities of the process of consensus-building in our Parliamentary system”.

The crucial debate starts here. The CAG’s view is that auctions could have started from 2004. Out of the four views of the law ministry, the first three hold that auctions could begin by executive order and the third also said the law could be amended side by side. The fourth is an opinion given during a discussion to the effect that the law had to be changed.

If we read all the four opinions together, it is clear that auctions could have started by administrative order and the amendment to the Act initiated at the same time. Such views and actions are not new. When service tax was introduced in the 1994 Budget, the law ministry and the finance ministry did just that. Initially, the constitutionality of the new tax was ensured through Entry 97 in the Union List (the entry refers to “any other matter” not mentioned in the State or Concurrent list) of the Constitution. Later in 2003, the Constitution was amended to introduce Entry 92C in the Union List, specifically for tax on services.

So, it was for the government to choose the quick method or the long method. For coal block allocations, the government chose the long method. The CAG says this long method caused a delay that has resulted in undue gain to private parties and it is possible to agree with this view.

Policy: The prime minister has said it is not acceptable that “a decision of government to seek legislative amendment to implement a change in policy should come for adverse audit scrutiny”. To this I would say it is definitely subject to audit scrutiny. First, it is an executive decision, not a legislative one. Second, Section 16 of the CAG’s (Duties, Powers and Conditions of Service) Act 1971 authorises the CAG to “satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue” (italics added). Thus, the CAG can rightfully say the auction process was a better “design” to net more revenue.

Consensus-building with states: This contention is based on the presumption that it was necessary to make the states agree to the auction process. The regulation of mines and minerals is a central subject under the Constitution under Entry 54 of List I – that is, the Union List – read with entry 50 of the State List. So, there was no constitutional hindrance.

Estimation of losses: The CAG’s loss estimate of Rs 1,86,000 crore has come in for various criticisms.

One criticism is that the loss has not been discounted. This is not a good argument. Discounting is not necessary because the calculation is based on current prices; it would have been necessary if the losses were based on projected prices.

Second, the prime minister has criticised the computation on the ground that computing extractable reserves on the basis of averages would not be correct. Actually, the CAG has taken this data from the Coal Controller’s office and website and other expert committee reports, which is the best and most authentic data on hand.

Third, the prime minister has said the cost of production can vary, so it is incorrect for the CAG to base its calculations on an average cost. But all presumptive valuations are based on some postulates. Coal production costs are generally similar, though not the same. The CAG’s estimation is hypothetical, no doubt, but reasonable assumptions do not harm a theory. It is like calculating the undervaluation of imported goods, which is done by comparing with the same or similar goods as provided in the internationally accepted valuation provisions of the Customs Act. Here, too, the same types or similar goods have been accepted for comparison of prices and cost.

Finally, the prime minister has also pointed out that coal blocks are captive for specific end-users and, therefore, it would not be appropriate to link the allocated blocks to the price of coal sold by Coal India Ltd. It is difficult to agree with this view because even goods for captive consumption are valued for tax purposes like goods sold in the normal course.

If there is an error in estimation, it is that the presumptive loss should be calculated from August 2006, when the law ministry gave its opinion about the possibility of introducing coal block auctions by administrative fiat and simultaneously introducing amendments to the Act. To that extent, the loss to the exchequer would be lower.

All this would be better understood if the issue were properly debated and discussed in Parliament. But equally, the government’s adversarial attitude to the CAG must change. The office should be complimented for doing a stellar job in pointing out a serious systemic flaw. The role of a constitutional post cannot be limited to pettifoggery.


The writer is former member of Central Board of Excise and Customs  

First Published: Thu, August 30 2012. 00:06 IST