Rahul Gandhi recently came back to India from his foreign sojourn of nearly two months. And in his new avatar, Rahul is angry. One of the things he is angry about is the fact that the Narerndra Modi government after coming to power decided to go slow on increasing the minimum support price of wheat and rice. The MSP is the price at which the government buys rice and wheat from the farmers, through the Food Corporation of India(FCI) and other state government agencies. Rahul told a farmers’ rally in New Delhi on Sunday: “We increased the MSP of wheat from Rs 540 to Rs 1400…The MSP has not changed, no benefit to farmers.” Between 2005-2006 and 2013-2014, the MSP of wheat was increased at an average rate of 14% per year. The Congress led United Progressive Alliance(UPA) was in power throughout this period. In comparison, between 1999-2000 and 2005-2006, the price had gone up by 4% per year. The decision to raise MSP did not have any method behind it. It was totally random. A report released by the Comptroller and Auditor General in May 2013 pointed out that “No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.” Nevertheless, political decisions do not follow economic logic. But the question is did this decision to constantly keep increasing the MSP benefit the people of India at large. The answer is no. It was the major reason behind the high inflation in general and food inflation in particular, that was seen between 2008 and 2014. As economist Surjit Bhalla put it in a November 2013 column in The Indian Express “For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI…When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up.” Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares. Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Is Rahul not worried about them? They may not be farmers who own land, but they also farm land in this country. Also, Rahul needs to realize that only a small section of the farmers have a marketable surplus, which they are able to sell to the government. This is primarily because the average holding size of land has come down over the decades. The State of the Indian Agricultural Report for 2012-2013 points out that: “As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size of holdings for all operational classes (small & marginal, medium and large) have declined over the years and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.” This means that only a small section of the farmers make money only from agriculture. Only 17% of farmers survive on income totally from agriculture. The rest do other things as well to make money. And given this they are hurt by the food inflation because of a rapid increase in MSP. The Congress led UPA government also increased the MSP of rice at a very rapid rate. In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year. This rapid increase in MSP led to a huge amount of food grains landing up with the government. The FCI did not have enough space to store all this grain. “Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI’s own admission in the Parliament,” a Crisil Research report points out. Rice formed 84% of the total damage. While rice and wheat rotting in government godowns, there wasn’t enough of it going around in the open market. The CAG report referred to earlier points out that in 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes. Also, with MSPs being increased every year at a rapid rate, “the cropping pattern,” the Crisil report points out, was also “biased towards food grains like rice and wheat,” and this led to their “excessive production”. This is what the Congress led UPA’s policy of constantly increasing MSPs, actually did. To conclude, as the old English saying goes, “the proof of the pudding is in eating it”. If the policy of the Congress led UPA government of increasing MSPs at a rapid rate was so good, why did the Congress party end up with only 44 seats in the 2014 Lok Sabha elections? Maybe Rahul Gandhi has an answer for that.
Lawyers who become politicians are very good at giving things a good spin. The Congress led United Progressive Alliance(UPA) was full of such individuals, who could provide a good spin 24/7 to various things that were going wrong during the regime. The biggest spin came when the Comptroller and Auditor General(CAG) Vinod Rai exposed the coalgate scam and estimated that the losses to the nation were around Rs 1,86,000 crore. (You can read how the number was arrived at here). Various Congress politicians worked overtime to suggest that there were no losses. The then finance minister P. Chidambaram had said: “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued.” Other leaders suggested that the CAG Rai(who former bureaucrat turned politician N.K.Singh labelled as the bhumihar from Ghazipur) had political ambitions. Manish Tewari, the Congress leader who during his heydays could have an opinion on anything and everything, had said: “R-virus has infected the Indian growth story. The R-virus stands for a phenomenon were responsible individuals decide to become loose cannons.” On another occasion, Tewari had commented that: “When individuals decide to go rogue, institutions suffer. That possibly has the most detrimental effect on the India growth story.” Montek Singh Ahluwalia, the former deputy chairman of the now defunct Planning Commission, had claimed that “untrained staff [is] auditing CAG reports.” Long story short—the official propaganda machinery worked overtime to discredit Rai. They told us time and again that giving away coal free was not leading to any losses. Even without getting into any technicalities, how can giving away something ‘free’ not lead to losses is not something that any of these politicians bothered to explain. In the early 1990s, the government realized that enough coal was not being produced to meet the demand. Hence, it decided to amend the the Coal Mines(Nationalisation) Act with effect from June 9, 1993. This was done largely on account of the inability of Coal India Ltd (CIL), which produces most of India’s coal, to produce enough coal. The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.” The amendment allowed companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Any excess coal that was produced had to handed over to the local subsidiary of CIL. Using this amendment, the government gave away 204 coal blocks for free over nearly two decades. Most of these free coal blocks were given away between 2004 and 2011, when the Congress led UPA was in power (and that explains why the businessman turned Congress politician Naveen Jindal was the biggest beneficiary with nine coal blocks allotted to him). Nevertheless even by 2011-2012, these coal blocks produced only 36.9 million tonnes of coal. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year. In August 2014, the Supreme Court cancelled the allocation of these blocks. The Screening Committee method used to allot blocks was not up to the mark, it suggested in the judgement. The coal blocks were allocated based on the recommendations of an inter ministerial screening committee. As Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “This committee was to scrutinize applications for captive mining and allocate coal blocks for development, subject to statutes governing coal mining, following which the coal minister would approve the allotment…The screening committee is expected to asses applications based on parameters such as the techno-economic feasibility of the end-use project, status of preparedness to set up the end-use project, past track record in executing projects, financial and technical capabilities of applicant companies and the recommendations of the concerned state governments and ministries.” The Supreme Court judgement dated August 25, 2014, did not find this approach up to the mark. It pointed out that: “the entire exercise of allocation through Screening Committee route thus appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.” The judgement further pointed out that “there is no evaluation of merit and no inter se comparison of the applicants.” After the cancellation, the government decided to auction the coal mines. Over the last few days the government has been auctioning the first lot of these coal blocks. Fourteen out of the 19 blocks that are on auction have been sold till now, for a whopping Rs 80,000 crore. What this clearly shows is that Vinod Rai was right about the losses all along. And it wasn’t just about the money. Here are seven reasons that justify that:
a) All the zero loss theories offered by the various Congress politicians were bogus. The government has already earned close to Rs 80,000 crore, which will be paid by winning companies over the years. It needs to be mentioned that more than 200 coal blocks will be eventually auctioned. Imagine the kind of money we are talking about here.A report in the Business Line points out that “according to government estimates, from the entire 204 blocks to be allocated/auctioned in phases, over Rs 15-lakh crore was expected to be garnered over the lifetime of the mines.” “But now we see this number could be higher,” a Coal Ministry official told the newspaper. Interestingly, the CAG had said in its report that: “A part of this financial gain could have been tapped by the government by taking timely decision on competitive bidding for allocation of coal blocks.” b) Vinod Rai and the loss estimate of Rs 1.86 lakh crore made by the CAG, was very conservative at best. But accountants are expected to be conservative. The CAG worked with fairly conservative estimates on this front as well. Typically extractable reserves are around 80-95% of the geological reserves of coal. The portion of the geological reserves that can be extracted are referred to as extractable reserves. As Rai writes in his book: “Audit based its computation on [the] conservative estimate of 73 million tonnes for every 100 million tonnes given in the GR [geological reserve]…Can audit be faulted if its computation was based on a conservative estimate of 73 per cent?…The extractable reserves…based on the aforementioned method, was found by the CAG to be 6282.5 million tonnes, which is mentioned in the report.” Hence, only 6.28 billion tonnes of the 44.8 billion tonnes of geological reserves was assumed as extractable reserves while calculating the losses of the government. You can’t hold that against Rai. c) The ‘auction’ is a very clean way of doing things unlike the ‘behind the doors’ screening committee method. Further, there was no ‘fair’ way of going about allocation of coal blocks through the screening committee method. It went against the basic principle of equity. Former coal secretary P C Parakh explains this in Crusader or Conspirator—Coalgate and Other Truths: “By the time I took charge of the ministry, the number of applicants for each block had increased considerably although still in single digits. I found a number of applicants fulfilling the criteria specified for allocation of each block on offer. This made objective selection extremely difficult.” In fact in the years to come the situation became significantly worse. As Parakh writes: “According to CAG’s report, 108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?” Allocating blocks through an auction takes care of such issues. d) By attaching a certain price to the coal block the government should be able to keep the non-serious players out. Take the case of the Rampia coal block mentioned earlier, where 108 applications were received. When something is available for free everybody wants it. e) Also, once companies have to pay for a block, the chances are that they will try and ensure that they start producing coal as soon as possible. This was something that was not happening earlier. As per the 11th five year plan, which started in 2007-08, the production from the captive coal blocks was to expected to touch 111 million tonnes of coal per year by 2011-12. The captive coal blocks produced 36.2 million tonnes of coal during the course of that year. By 2016-17, the production of coal from these blocks was expected to touch 330 million tonnes. In 2013-2014, these blocks produced only 39 million tonnes. What this tells us is that many non-serious players had got the blocks as well. f) Indian businesses have for too long been used to getting things for free, including coal. This has led to the misconception that thermal power is cheap, which is not. Once, the right price of coal is taken into account, other forms of generating electricity might start to look viable. And that will be good for the environment. g) And finally, transparency is very essential whenever the government is selling a public asset. It goes a long way in controlling crony capitalism. Coal auctions are worth all the trouble just for this one reason.
In an interview to NDTV, Naveen Jindal , chairman of Jindal Steel and Power, and Congress politician said that his company would not be able to pay the fine imposed by the Supreme Court. “We will not be able to pay it..because we have not made a provision for it,” Jindal said. Jindal also told the television channel that the Supreme Court decision “was a ‘setback’ for companies which have mined coal for the past 20 years to generate power and make steel, and now been told that what they are doing is illegal, while they have been creating wealth for the country.” In a decision on September 24, 2014, the Supreme Court had cancelled 204 out of the 218 coal blocks allocated by the government since 1993. The coal blocks were allocated for free for captive mining. Companies which were given these blocks could use the coal to produce power, iron and steel, aluminium, cement etc. The Court has also fined companies at the rate of Rs 295 per tonne for all the coal that they have produced till date and will continue producing till March 31, 2015, when they need to hand over their mines to the government. Jindal was the biggest beneficiary of the captive coal block allotments, having been given nine blocks in all. Given this, things he has said in the NDTV interview need to be looked at closely. The first thing Jindal talks about are “companies which have mined coal for twenty years.” No company has been mining coal for twenty years. Provisional coal statistics released by the Coal Controller Organisation, which is a part of the coal ministry, shows that coal was first mined by the captive coal blocks only in 1997-98. Also, during this year a minuscule amount of 0.71 million tonnes of coal was produced by these mines. The production crossed 10 million tonnes of coal only in 2004-2005, when these blocks produced 10.11 million tonnes. Hence, serious production from these coal mines has happened only for 10 years and not 20 years as Jindal points out. This was primarily because between 1993 and 2002 only 15 blocks had been allocated to private companies. This maybe nitpicking, nonetheless it is an important factual point to make given the sensitivity of the issue. In Jindal Steel and Power’s case the Gare Palma IV coal block has been operational from February 1999. This coal mine produced 6 million tonnes of coal in 2013-2014 and is expected to produce a similar amount in 2014-2015. Further, just because something has been happening for many years, doesn’t mean it is right, even though it may have been government policy. The coal blocks were allocated based on the recommendations of an inter ministerial screening committee. The committee was set up in July 1992 and the coal secretary was its chairman. As Vinod Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “This committee was to scrutinize applications for captive mining and allocate coal blocks for development, subject to statutes governing coal mining, following which the coal minister would approve the allotment…The screening committee is expected to asses applications based on parameters such as the techno-economic feasibility of the end-use project, status of preparedness to set up the end-use project, past track record in executing projects, financial and technical capabilities of applicant companies and the recommendations of the concerned state governments and ministries.” The committee was supposed to look at each application based on these criteria and then make a decision of who to allot the coal block to. But that doesn’t seem to have happened. As the Supreme Court judgement dated August 25, 2014, clearly points out “The entire exercise of allocation through Screening Committee route thus appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.” The judgement further points out that “there is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.” Further, the guidelines that the Screening Committee was supposed to follow did not contain “any objective criterion for determining the merits of the applicants.” “As a matter of fact, no consistent or uniform norms were applied by the Screening Committee to ensure that there was no unfair distribution of coal in the hands of the applicants.” The Supreme Court came to this conclusion after studying the minutes of the Screening Committee meetings. Interestingly, the Comptroller and Auditor General(CAG) had come to a similar conclusion when it had audited the procedure for allotment of coal locks in mid 2011. As Rai points out “The process that the committee actually followed was not really clear from the records. All that the records showed was that the committee met, deliberated and merely recorded the name of the block allotted to a company, and the state where the end-use plant existed. It is left to the reader to decide if transparency was a victim and, if so, how audit erred in pointing out this lacuna.” The problem was that even if the Screening Committee wanted to follow objective criteria, at times it was simply not possible. Former coal secretary P C Parakh (who took over as coal secretary in the second week of March 2004) explains this in Crusader or Conspirator—Coalgate and Other Truths “By the time I took charge of the ministry, the number of applicants for each block had increased considerably although still in single digits. I found a number of applicants fulfilling the criteria specified for allocation of each block on offer. This made objective selection extremely difficult.” In fact in the years to come the situation became much worse as more and more companies applied for coal blocks. As Parakh writes “According to CAG’s report, 108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?” Parakh to his credit realized pretty early that the Screening Committee method of allotment wasn’t working. In fact, in his book Parakh goes on to list several reasons on why giving away coal blocks free for captive mining by companies just did not make sense. By giving away coal blocks for free, companies which had no experience in coal mining were getting into a totally unrelated field. The government had no way of monitoring whether the captive mine was being used for captive use. Or was the company, which had got the coal block, selling the coal it was producing in the open market and thus “promoting corruption and black money”. Further, the system of allocation of coal blocks for free was discriminatory. It offered a huge premium to companies which managed to get a free coal block, in comparison to ones that did not. Hence, Parakh proposed to Manmohan Singh(who had taken over as coal minister) in August 2004 that coal blocks should be allotted through the competitive bidding route. Before he did this Parakh had even called an open discussion of all the stakeholders in June 2004. The stakeholders included the business lobbies FICCI, CII and Assocham, other ministries whose companies had applied for coal blocks and private companies. Parakh points out that most invitees were not in favour of competitive bidding of coal blocks. As he puts it “not many participants were enthusiastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.” Parakh suggests that assuming that business men bidding for coal blocks (if such a process were to be introduced) would drive up the price of coal to astronomical levels is suggesting that they are stupid. As he writes “Participants at open auctions are hard-headed businessmen with an acute sense of profitability. They do not make irrationally high bids. The price at which coal from CIL[Coal India Ltd] was available would automatically put a cap on the bid amount.” The industry ultimately resisted open bidding simply because until then they had been getting coal blocks for free. And if something is available for free why pay for it. “To an extent, it was a reflection of corporate India’s aversion to transparency,” writes Parakh. Nevertheless on August 20, 2004, Manmohan Singh approved allocation of coal blocks through the competitive bidding route. Immediately after this a number of letters written by MPs opposing competitive bidding started coming in. As Parakh writes “This included one from Mr Naveen Jindal who had considerable interest in coal mining.” This is when Dasari Narayana Rao, the famous Telgu film director, who was the minister of state for coal. entered the scene. As Rai points out in his book “Rao, observed that any change in the procedure for the allocation of coal blocks would invite further delay in allocation.” As Rao wrote while submitting the file to Manmohan Singh: “It is difficult to agree with the view that Screening Committee cannot ensure transparent decision-making. This alone was not adequate ground for switching over to a new mechanism, particularly when the interests of core infrastructure areas are involved.” On March 25, 2005, Manmohan Singh “recorded the approval of the cabinet note seeking sanction of the competitive bidding system,” Rai points out. But Rao still did not give up and kept talking about the “cost implications” of the competitive bidding system of allocation of coal blocks. He finally succeeded and on July 25, 2005, it was decided that the coal ministry would continue to allot coal to blocks through the Screening Committee route. In May 2014 the enforcement directorate slapped money laundering charges against Rao and Jindal. As the PTI reported “The agency, according to sources, has framed the charges after it found multi-layered transactions between the firms owned by Jindal to Rao’s firms based in Hyderabad and “illegal money” was routed for alleged favours given for the allocation of coal firms to Jindal.” Interestingly Jindal told NDTV that “one of the Jindal companies had lent money to an unrelated company, which in turn invested in a company in which the Mr Rao had a controlling stake.” Given this, the situation is not as simplistic as Jindal tried to project in his NDTV interview. Also, between the Supreme Court and the CAG it has been clearly established that the Screening Committee route to allot coal blocks was not transparent at all and companies which got coal blocks benefited from this lack of transparency. Given this, it led to the Supreme Court cancelling 204 out of the 218 blocks that had been allocated, including coal mines which were already under operation. Jindal in his interview also told NDTV that his company won’t be able to pay the fine imposed by the Supreme Court because they hadn’t made a provision for it. The Supreme Court has fined the companies already operating coal blocks Rs 295 per tonne for all the coal that they have produced till now and all the coal they will continue to produce till March 31, 2015, when they need to hand over the mines back to the government. This in a way took care of what Parakh termed as discriminatory. As he writes “The [Screening Committee] system of allocation of captive [coal] blocks offers huge advantage to industries that get coal blocks over those who are not able to get coal blocks.” Edelweiss Securities estimates that Jindal Steel and Power will have to pay a fine of close to Rs 3000 crore. While the company may not have made a provision to pay the fine, it needs to be pointed out that as on March 31, 2014, the company had a balance sheet size of Rs 74,072.1 crore. Its reserves and surplus amounted to Rs 22,519 crore. It had cash and bank balances of Rs 1,015.28 crore. Further, in the last two financial years it has made a total profit of Rs 4820.5 crore. Also, let’s calculate the financial benefit arising out of the Gare Palma IV coal block which as pointed out earlier has been operational from February 1999. This coal mine produced 6 million tonnes of coal in 2013-2014 and is expected to produce a similar amount in 2014-2015. A research report brought out by Kotak Institutional Equities suggests that it costs Rs 600-800 per tonne to produce captive coal. In comparison, it costs Rs 3,500 per tonne to import coal. Hence, imported coal is four to five times more expensive than captive coal. So the cost of producing 12 million tonnes of coal over a two year period at the upper end cost of Rs 800 per tonne would have been Rs 960 crore. Along with a fine of Rs 295 per tonne this amounts to Rs 1314 crore. Consider the other possibility of importing coal at Rs 3500 per tonne. This would have cost the company Rs 4200 crore. The difference between these two numbers comes to Rs 2886 crore. This calculation just takes the last two years into account. Nevertheless the mine has been functioning for close to 15 years now. The total fine that the company needs to pay amounts to around Rs 3000 crore. Hence, even after it pays the fine the company would have managed to save a lot of money over the years because it got the coal block for free through a process which wasn’t transparent at all. In fact, Jindal isn’t the only one protesting. The pink papers over the last few days have been full of quotes criticizing the Supreme Court’s decision to cancel the coal block allocations. But when a process has not been transparent for 20 years, it needs to be cancelled. And when this happens, there are bound to be repercussions, which the incumbents won’t like. As the American author Upton Sinclair once wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” The corporates and their lobbies who are coming out against the Supreme Court’s decision are a good example of this. It needs to be pointed out here that only 40 out of 218 coal blocks are currently operational. Companies, given that they had got blocks for free, seemed to be in no hurry to start production. That wouldn’t have been the case, had they paid for it in the first place. To conclude, it is worth quoting what Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists “Since a person may be powerful because of his past accomplishments or inheritance rather than his current abilities, the powerful have a reason to fear markets…Those in power – the incumbents – prefer to stay in power.” Jindal clearly would have liked that. The article originally appeared on www.FirstBiz.com on Sep 28, 2014
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
In a blog on The Economic Times website TK Arun writes that “Former CAG[Comptroller and Auditor General] Vinod Rai does a far better job of drumming up publicity for his book than he did of auditing the government’s accounts.” This is a very serious charge and needs to explored in detail. Arun further writes that “The New Telecom Policy identified, in 1999, the goal as maximizing the spread of telecom, so as to accelerate the pace of social and economic development.” True. But there are certain details that one needs to look into. The National Telecom Policy of 1999 had set a teledensity target of providing 15 telephone connections per 100 of population. The teledensity in 2001 had stood at 3.58. In September 2007, a teledensity of 18.22 had been reached. It was only in September 2007 that the shenanigans of the then communications minister A Raja started. In a press release put out by on September 25, 2007, applications were invited for telecom licenses. The last date was set to October 1, 2007, a week later. In total 575 applications for 22 service areas were received by the communications ministry. There wasn’t enough telecom spectrum available to allocate to so many applicants. So what was the way out? In fact, the tenth plan document clearly mentions this, when it comes to spectrum allocation: “pricing needs to be based on relative demand and supply over space and time in a dynamic manner, [with] opportunity cost to reflect relative scarcity of the resource in a given situation.” So yes, the goal of the National Telecom Policy of 1999 was to maximize the spread of telecom, but there were other factors to consider as well. Interestingly, Manmohan Singh wrote a letter to A Raja on November 2, 2007. In this letter Singh said “In order that spectrum use efficiently gets directly linked with the correct pricing of spectrum, consider (i) introduction of a transparent methodology of auction, wherever legally and technically feasible, and (ii) revision of entry fee, which is currently benchmarked on old spectrum auction figures.” The telecom licenses were to be given away by following the first-come-first-served process, with an entry fee being charged. An entry fee of Rs 1,651 crore, set in 2001 was being charged. The Indian telecom sector had totally changed in the meanwhile. As mentioned earlier the teledensity in 2007 was at 18.22 per 100 of population, having exploded from 2001 onward when it was at 3.58. Taking these factors into account, the telecom regulator TRAI had also pointed out in August 2007 that “In today’s dynamism and unprecedented growth of telecom sector, the entry fee determined in 2001 is also not the realistic price of obtaining a license. Perhaps it needs to be reassessed by a market mechanism.” As Rai points out in his book Not Just An Accountant—The Diary of the Nation’s Conscience Keeper: “It is obviously no one’s case that we need to sit back once a target is achieved, but surely revenue mobilization, in lieu of a scarce national resource being made available for private commercial exploitation where tariff is not fixed, cannot be totally overlooked.” If nothing else, at least the rate of inflation had to be taken into account while charging an entry fee. The National Telecom Policy of 1999 aimed at maximizing teledensity, nevertheless there were certain ifs and buts built into it. As Manmohan Singh pointed out to Raja in the letter cited earlier: “The DoT [department of telecom] has received a large number of applications for new licenses in various telecom circles. Since spectrum is very limited, even in the next several years all these new licensees may never be able to get spectrum. The Telecom Policy that had been approved by the Union Cabinet in 1999 specifically stated that new licenses would be given subject to availability of spectrum.” So, it wasn’t just about maximizing the spread of telecom, as Arun wants us to believe. Other practical issues needed to be considered as well. Arun further goes on to write “As for Rai’s criticism of Manmohan Singh, it would be fair to ask: has he estimated the cost that would have been inflicted on the nation by the political turmoil and uncertainty caused by the then-PM refusing to yield to coalition compulsions?” This argument doesn’t make any sense to me. It has been well established by now that Manmohan Singh was aware of what Raja was up to, but chose not to do anything about it, after writing a couple of letters to Raja. Singh responded on November 21, 2007, by sending what former CAG Rai calls a “template response”. In this letter Singh acknowledged that he had received Raja’s recent letter on the recent developments in the telecom sector. Raja wrote to the prime minister again on December 26, 2007. Singh again responded with the same templated response on January 3,2008. Raja had dismissed Singh’s suggestion of considering an auction. And Singh had not done anything about it. In fact, he went on to distance himself from the decisions being made by Raja. Joint secretary Vini Mahajan recorded that the prime minister “does not want a formal communication and wants PMO to be at arm’s length.” As Rai asks “How can the office of the prime minister distance itself from such major decisions? Arm’s length from the action of his own government?” The straightforward answer here that Singh was just trying to run a coalition government. But as Rai put it in a recent interview to Outlook “Does good politics mean just staying in power? Integrity is not just financial; it is intellectual integrity; it is professional integrity. You have an oath of allegiance to the constitution and that is important.” Hence, what is clear here is that Singh was more interested in continuing to be PM rather than making what he thought was the right decision. Arun further writes ” In estimating a notional loss to the exchequer of Rs 1,76,000 crore from not holding auctions to allocate 2G spectrum, Rai erred on multiple counts.” The CAG report on the 2G scam had four computations of the loss to the country. These numbers were Rs 67,364 crore, Rs 1,76,645 crore, Rs 69,626 crore and Rs 57,666 crore. The CAG did not put out only one estimate. The media of which Arun is a part of picked up the highest number and splashed it all over. That was clearly not Rai’s fault. On February 2, 2012, the Supreme Court cancelled all the licenses that had been issued by A Raja. These licenses had to be auctioned again. The two rounds of auctions that happened netted the government Rs 78,505 crore. This number is more than the three out of the four options of losses that the CAG calculated. As T N Ninan wrote in the Business Standard “As it happens, the CAG has more than one figure of revenue loss. Several commentators have also come up with numbers, which run into tens of thousands of crores. And because of the aberrant manner in which Mr Raja handed out these substantial gifts, it became the largest scam in our history.” Arun further writes “[Rai] failed to take into account the additional revenues the government earned from allocating spectrum in the manner in which it did, instead of holding auctions.” This is a basically using the end to justify the means and in the process advocating crony capitalism as well. When the press release inviting applications for telecom licenses was put out, the potential applicants were asked to apply between September 25, 2007 and October 1,2007. In a letter written to Manmohan Singh on November 2, 2007, Raja had informed him that he had decided to advance the cut off date for licenses to September 25,2007, the date on which the press release was issued for the allocation of licenses, instead of October 1, 2007. Raja did not offer any reasons for the same. Singh did not ask. What is interesting nonetheless is that thirteen applicants seemed to have known of this change in date, in advance. How else do you explain the fact that certain applicants appeared with demand drafts amounting to thousands of crore, which had been issued even before the press release inviting applications for telecom licenses was put out on September 25, 2007. Given these reasons, I guess its time that certain sections of the media stop portraying Rai as the villain of the piece. The real villains were the politicians starting with Manmohan Singh who let A Raja to carry out the 2G scam. As Rai writes “The MPs tore into the CAG’s findings. Congress MPs walked up to me…and said ‘We have to ensure that the prime minister’s name does not get dragged into this,’ adding, ‘What you people presented appears so reasonable, but what do we do?’ Such are the ways of parliamentary democracy practised by some.” To conclude, as far as Rai drumming up publicity for his book is concerned, what is wrong with that? It’s a book that needs to be read by every thinking Indian who wants to “really” understand how the politicians of UPA took India for a ride, over a period of ten years. The article originally appeared on www.FirstBiz.com on Sep 19,2014 (Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
In an interview with the Business Standard in September 2013, Jairam Ramesh was asked why the Congress party was losing ground so badly in urban India. “Because of the bhumihar from Ghazipur,” Ramesh replied. He was referring to the former Comptroller and Auditor General (CAG) of India, Vinod Rai, who had retired from his post in May 2013. The CAG in a series of reports had exposed the wrongdoings of the government. As Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “Jairam Ramesh was a regular visitor to the CAG headquarters for discussions on the audit of the national rural employment guarantee programme. His discussions did indeed lend value. In one of the conversations with me, he asked why N.K.Singh, the Rajya Sabha MP representing the Janata Dal(United), used to refer to me not only as a bhumihar but as a ‘bhumihar from Ghazipur’. I told him I did know what it meant.” Rai further writes that even his caste was brought into prominence, “and this after sixty-seven years of independence.” Ramesh’s quip against Rai was a part of a series of statements made by leaders of the Congress party to discredit him. This after, the CAG had meticulously gone about exposing wrongdoings of the government in the telecom, coal, sports and aviation sectors. Manish Tewari, the Congress leader who can speak on just about anything, said that the “R-virus has infected the Indian growth story. The R-virus stands for a phenomenon were responsible individuals decide to become loose cannons.” On another occasion Tewari said “When individuals decide to go rogue, institutions suffer. That possibly has the most detrimental effect on the India growth story.” Sharad Pawar, who is a part of the UPA, and was the food and agriculture minister in the UPA government said “CAG has taken certain decisions that have created a different atmosphere in the country… I haven’t seen anything like this in the forty-five years of my career as a politician.” Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, went on to claim that “untrained staff [is] auditing CAG reports.” The business lobby ASSOCHAM even went to the extent of releasing advertisements which said that CAG reports were sending wrong messages. The advertisement went on to state “The CAG’s conclusions over the 57 coal block allotment appear to have been arrived at without taking all facts into consideration. Only one of the 57 blocks has gone into production.” The then finance minister P Chidambaram even went to the extent of saying that the government had faced no loss from giving away coal blocks free to private and public sector companies. “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,”Chidambaram had said. In order to understand this statement we need to go back to the early 1990s. The government at that point of time realized that enough coal was not being produced. The Coal Mines(Nationalisation) Act was amended with effect from June 9, 1993. This was done largely on account of the inability of Coal India Ltd (CIL), which produces most of India’s coal, to produce enough coal. The coal production in 1993-94 was 246.04 million tonnes, up by 3.3% from the previous year. This rate was not going to increase any time soon as newer projects had been hit by delays and cost over-runs, as still often happens in India. As the Economic Survey of 1994-95 pointed out “As on December 31, 1994, out of 71 projects under implementation in the coal sector, 22 projects are bedevilled by time and cost over-runs. On an average, the time over-run per project is about 38 months. There is urgent need to improve project implementation in the coal sector.” The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.” The amendment to the Coal Mines (Nationalisation) Act 1973 allowed companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Hence, the coal that these companies produced in these mines was to be used to feed into the production of power and iron and steel. Any excess coal was to be handed over to the local subsidiary of the Coal India Ltd. Between 1993 and 2011, 195 coal blocks were given away for free to public and private sector companies for captive use. Most of these free coal blocks were given away between 2004 and 2011. Nevertheless even by 2011-2012, these coal blocks produced only 36.9 million tonnes of coal. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year. And because very little coal was being produced in these captive mines, this led Chidambaram and the industry lobby Assocham to put forward the argument that since coal was not being mined how did the government face any losses? This was a really stupid argument to make. The government handed over a natural asset free to private and public sector players. They, in turn, were not able to mine coal from it quickly enough. How does that mean that the government did not face any losses? It does not change the fact that coal blocks were essentially handed over for free. As Rai puts it in his book: “I thought any prudent and concerned industry body would have questioned the urgency to allot when the allottees had not even commenced mining. But then, since every person who wanted to display his loyalty to the government was hastening to take potshots at the CAG, why not an industry body?” Interestingly, Manmohan Singh explained the inability of the private coal producers to start producing coal quickly enough by saying “it is true that the private parties that were allocated captive coal blocks could not achieve their production targets. This could be partly due to the cumbersome processes involved in getting statutory clearances.” This Rai says is a defeatist argument. As he writes “This does appear to be a defeatist argument; if the government is aware that the processes are cumbersome and accords the process urgency, it is incumbent on the government to take steps to ensure speedy clearances.” The CAG came in for heavy criticism for coming up with a loss figure of Rs 1,86,000 crore for these coal blocks being given away free by the government. In his book, Rai explains with great clarity how this number was arrived at. The CAG worked with most conservative estimates while coming up with this number. While calculating the loss the CAG did not take into account the coal blocks given to the public sector companies. Only blocks given to private sector companies were taken into account. The total geological reserves of the coal blocks given away for free amounted to around 44.8 billion tonnes. The total amount of coal in a block is referred to as geological reserve. But not all of it can be extracted. Open cast mining of coal typically goes to a depth of around 250 metres below the ground whereas underground mining goes to a depth of around 600-700 metres. Beyond this, it is difficult to extract coal. The portion of the geological reserves that can be extracted are referred to as extractable reserves. The CAG worked with fairly conservative estimates on this front as well. Typically extractable reserves are around 80-95% of geological reserves. As Rai writes “Audit based its computation on [the] conservative estimate of 73 million tonnes for every 100 million tonnes given in the GR [geological reserve]…Can audit be faulted if its computation was based on a conservative estimate of 73 per cent?…The extractable reserves…based on the aforementioned method, was found by the CAG to be 6282.5 million tonnes, which is mentioned in the report.” So only 6282.5 million tonnes of the 44.8 billion tonnes of geological reserves was assumed as extractable reserves while calculating the losses of the government due to giving away coal blocks for free. After establishing the extractable reserves the CAG needed to establish the price at which this coal could be sold as well as the cost of production of this coal. For establishing the price at which the coal cold be cold, the CAG considered three possible options. “The first was by imports. The average import price of non-coking coal sourced from Indonesia during 2010-2011 was Rs 3,678 per tonne (Indonesia supplied most of our non-coking coal imports). The second source was the coal sold in e-auction by Northern Coalfields Limited, a subsidiary of CIL [Coal India Ltd] based in Singrauli. The third and major source of coal supply in the country was that which was mined and supplied by CIL. Audit utilized the only creditable data available in the public domain—that of CIL. CIL is regularly audited by the CAG, so its accounts and other details can be taken as authentic. From the audited accounts of 2010-2011, the average sales price of all grades of coal sold by CIL was taken as Rs 1,028 per tonne. This was the most conservative price too,” writes Rai. After this, the cost of production of coal needed to be established. For this, the CAG again went back to CIL, which produces most of the coal in the country. As Rai writes “The average cost of coal mined by CIL was found to be Rs 583 per tonne. The MoC has indicated, after due verification, that the financing cost ranged from Rs 100 to Rs 150 per tonne. To be on the safe and conservative side, audit assumed it to be at Rs 150. Thus, while the average sale price was Rs 1,028, the average cost was Rs 583 plus Rs 150, namely Rs 733,” writes Rai. Manmohan Singh later criticized this calculation by saying “the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure etc.” By taking the average cost of production these are exactly the factors that CAG was taking into account. And this left Rs 295 per tonne (Rs 1028 minus Rs 733) as the financial benefit. So Rs 295 of financial benefit per tonne was multiplied with 6282.5 million tonnes of extractable reserves and a loss figure of close to Rs 1,86,000 crore was arrived at. As you can clearly see the most conservative estimates had been used to arrive at a loss number. If the CAG had not used these conservative estimates it could have easily put out a much bigger number for these losses. Another criticism that the CAG came in for was that the loss calculation did not take the concept of net present value(NPV) into account. “Even if discounting had been done to arrive at the NPV, we would have possibly projected an annual increase of 10 per cent in cost/sale price, and we would then have discounted, at, say, a discount factor of 10 per cent. We would have got to an NPV of financial gain of Rs 2.40 lakh crore, at 11 per cent of Rs 1.86 lakh crore and at 12 per cent of Rs 1.49 lakh crore. There is no substantial difference. Hence, why all the ire?” In the end, Vinod Rai has had the last laugh. The Supreme Court in a recent decision deemed the allocation of coal blocks to be illegal. And for those who are still not convinced about the way Rai operated as the CAG, it is time they read his book. The article appeared on www.FirstBiz.com on Sep 16, 2014
(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek)