So where do we go from here At a minimum, we should have a balanced debate, a balanced appraisal, and an even more balanced remedy. An essential part of this balancing act is that we do not exaggerate the problem in order to either draw attention, or be holier than thou. Or indeed to be disingenuous.
It is with this as background that I want to discuss two recent debates in Indiathe intellectual corruption with respect to poverty in India (next week), and money corruption with respect to the coal allocations. Last week (Economically illiterate India, FE, March 24, http://goo.gl/2MF3X), I had assessed the CAGs allegation that R10.67 lakh crore had accrued as windfall gains to those who had been allotted licences to explore coal mines in India during the Congress-UPA reign from 2004 to 2009. By any criterion, this is a woman bites dog story. The alleged corruption amount is not small. It is more than five times the exaggerated notorious figure of R1.76 lakh crore that the CAG had imagined was lost with respect to the 2G scam. It is close to 7.6% of Indias GDP in 2011, or close to the entire consolidated central and states fiscal deficit of India.
How realistic was/is this number Not very, and that was the point of my earlier article. In an informed, and informative, Financial Express editorial on the same day (Powering the CAG scam http://goo.gl/yaUv1), the same point was madethe R10.7 lakh crore was, at best, a wild exaggeration. Should one dare say a corrupt exaggeration Despite these assessments, and despite an initial withdrawal from the CAG of its figure (it is just a preliminary report etc), we now receive the news that the CAG report is about to be finalised, as is. Further, that the R10.7 lakh crore figure was conservative, implying thereby that the true figure was very likely to be considerably higher. And, in words of the CAG chairman, Mr Vinod Rai, the CAG was internationally renowned for its accounting research and had been hired by international organisations.
As an Indian, I am always proud of Indian accomplishments and Mr Rais comments are reassuring with regard to the credibility of the R10.7 lakh crore figure. Case closednot quite. The reality is that the CAG, at least in its coalgate report, betrays a complete lack of understanding of even the first principles of accounting/auditingand auditing is CAGs middle name.
On page 34 of the 111-page draft report, the CAG presents a detailed table of the windfall gains that accrued to Indian corporations with the 33 billion tonnes of coal reserves allocated between 2004 and 2009. The table also states that the windfall gain accruing at prices prevailing at the time of allotment was a 41% lower figure of R6.3 lakh crore. The footnote to the table, in bold italics, also correctly warns that the actual amount of gain to the allocattees may change depending upon the mining plan, cost of extraction of coal by the allocattees, market price of the coal and quality of coal.
Forewarned is forearmed but not as far as the rockstar publicity-hungry CAG and the lap-it-up media is concerned. What was splashed in the papers, and in the equally publicity-at-any-costs opposition politicians domain, was the R10.67 lakh crore figure, and not the R6.3 lakh crore figure. This latter figure is more relevant because it takes costs and sale price and assumed windfall gains in the years of allocation. The R10.67 lakh crore figure projects the benefit at 2011 sale prices, but not at 2011 costs of production. Further, nowhere was it mentioned that practically very little of the R6.3 lakh crore profit had actually been realisedall of this was projected and in the far distant future of 25 to 30 years, i.e. the typical amount of time it takes for coal to be extracted, and sold for the windfall gain.
Imagine I ask you to give me R2,500 in exchange for which I will give you R100 for the next 25 years. Fair exchange, they say, is no robbery but even an accounting sophomore, and especially an accounting sophomore, will reject the deal. Why Because there is a time cost to the money, a cost that depends on the safest alternative investment. R100 invested today will be 10% higher next year; alternatively, R100 received next year is worth less than R100 this year.
Assume for a moment that the windfall gains of R6.3 lakh crore accrue evenly over the next 25 years, i.e. R25,200 crore per year. How much is this flow today, assuming the risk-free deposit rate is 10% It is 60% lower. So R6.3 lakh crore is actually R2.5 lakh crore in accounting, and auditing, terms. Further, the CAG rather ambitiously and optimistically and unrealistically assumes that 90% of allocated coal will be extracted. From the red herring prospectus of CIL, one obtains the insight that of its own superior quality reserves, CIL deems only 42% of its proven reserves to be extractable. Applying the same factor to the 33 billion tonnes (the actual factor is likely to be less) one obtains the result that the windfall gain is not R6.3 lakh crore but only R1.18 lakh crore.
Also, instead of doing the discounting, both in terms of time value of money and extractability of coal reserves ourselves, the market itself provides a figure through the market capitalisation of CIL. This is presented as estimate 2 in the table. Assuming the same market-cap-to-reserves ratio since CIL has been taken as the benchmark, the private sectors gain is R62,000 crore, a number which by its striking proximity to the first estimate of R55,000 crore reaffirms its correctness.
There is one further necessary adjustment/calculation. The CAG seems to be of the opinion that profits that accrue to CIL are holy, but the profits accruing to other public sector firms are not. Why this Kolaveri Di treatment to NTPC and other PSUs So, without rage, let us calculate profit accruing to the bad private sector capitalists. Well, these coal dirty capitalists were only able to garner about 47% of the windfall coal allocation. So the windfall gain accruing to them has a present discounted value of R55,000 crore, which is only 5.1% of the much-bandied corruption figure of R10.67 lakh crore. Furthermore, profits should accrue to those who undertake the risks of the venture, so it is not exactly clear how all of this is corrupt.
These calculations are what a good accountant would doCAG, are you listening
The author is chairman of Oxus Investments. He can be seen weekdays on NDTV Profit, Opening Fire, 8.30-9.00 am