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Scams, logic and the CAG

T.C.A. SRINIVASA RAGHAVAN
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Comptroller and Auditor General of India, Vinod Rai — V.V. Krishnan
Comptroller and Auditor General of India, Vinod Rai — V.V. Krishnan

Having known Vinod Rai, the CAG, on and off since 1967 when as a third-year student he ragged me with civilised disdain and genuine languor, both accompanied by an open contempt for the bad language used routinely by the others, I can say at least this much: he means well.

It is also not the purpose of this article to put up a defence for the government in any of the things pointed out by Rai. For all we know, regardless of what Rai says, ministers have been up to no good. They usually aren’t.

Also, as so many other civil servants have pointed out after the 2G affair, whether the policy was appropriate or not is a matter of opinion; but whether it was implemented correctly is a matter of fact.

But having entered all the important caveats, it does seem to me that the time has come to apply the rules of formal logic to the method adopted in the CAG’s reports.

Oftentimes, when you apply these rules to reports prepared by serving and former government employees, they appear less convincing than at first sight.

CAG’s method

The method used by the CAG is known as ‘statement calculus’ in logic. It seeks to establish causal relationships between two statements. Here are some examples.

1. If Ram is a thief, I will eat my hat.

2. Clear air turbulence leads aircraft to wobble in flight.

3. If there had been an auction, the exchequer would have gained.

Implicational relationships of this type between two statements are required by logicians to fulfil two conditions in order for the implication to be true: necessity and sufficiency. This rule is also used by good economists a lot.

In a nutshell, the rule says that for the second statement to be true, the first must be true as well.

Thus, anyone can assert that A must happen before B can happen. Or that whenever A is true, B is also true.

But more often than we like, the assumption can be a false one.

Specifically in the case of auctions and losses to the exchequer, Rai is assuming that auctions always lead to superior results than discretionary allocations.

This is not borne out by the evidence. A policy of auctions is not inevitably and inherently superior to a policy of discretionary allocations. Both can and do lead to sub-optimal outcomes.

In fact, the CAG’s method suffers from another flaw: it assumes that an auction is both necessary and sufficient for the best outcome to be achieved.

This is most certainly not true. It may be necessary but it is certainly not sufficient because collusion between bidders is always a danger.

Design Vs discretion

The key to a successful auction, as is well established now, is very precise design and zero communication between the different players, including the auctioneer. It is also well established that there is no ‘one size fits all’ design. Each auction has to be separately designed by experts.

As for discretionary allocations, the problem in India is not so much the discretion itself as the practice of demanding a bribe for using that discretion correctly.

This has been happening since the early 1980s when, strangely enough, it started in the coal sector. Bofors was another good an example of this.

In sum, the CAG therefore may not be quite right in presenting the case in the manner it has chosen. It means well but is perhaps using the wrong method.

(This article was published on August 19, 2012)
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Comments:

Vinod Rai, then a senior IAS officer was posted as Collector of Thrissur by K.Karunakaran ,then C.M of kerala.Everybody was surprised by the C.Ms posting of this no nonsense officer to the C.Ms home disrict.Rai did wonders in Thrissur thro development works.He had to be in charge of Trichur corporation for some period in those days .The town got the bus stands and other major developments in his period.wish him all the best

from:  appan varma
Posted on: Aug 20, 2012 at 07:12 IST

In all this deep analysis of methods employed, we tend to forget there
has been a lack of transparency. Auctions are superior to allocation.
Yes, if required, we need to design auctions for each block
individually. The argument is not that auction is the best method,
but nothing seems to be better than that.

It is perhaps not going to be possible to prove in court the mala
fides of the Government, but we should not say that the Auditor is
wrong in suspecting the rot.

from:  kalyan
Posted on: Aug 20, 2012 at 08:12 IST

Sir,
I disagree with the author. CAG is correct in presuming that the auction would have fetched more revenue since the commodity in question is scarece and limited. Secondly,by anouncing the intention to change the policy of allocation the govt has willingly or unwillingly sent a mssage to the companies to grab the once in a lifetime opportunity. What is to be debated and investigated is the motive behind the announcement and delay in formulating the new policy.

from:  murali
Posted on: Aug 20, 2012 at 12:27 IST

I dont agree with this article's opinion on CAG's analysis. If CAG
estimation of losses is wrong on 2G estimation. How come the base price
arrived by TRAI and EGOM on 2G re-auction is same with CAG's loss
estimates.

from:  Vignesh
Posted on: Aug 20, 2012 at 14:16 IST

The author has correctly pinpointed the wrong approch of Mr.Vinod
Rai,the CAG. As the rate adopted by the telecom minister on 2001 rates for the issue of 2G licenses in 2008 is wrong, then the three methods adopted by CAG to arrive at notional loss based on subsequent events,like UNINOR,SWAN 3G auction rates of 2010 are equally wrong.Whether it is a notional loss or actual loss,the GREAT loss
to the nation and the people is tha loss of TRUST of people in the
central government, thanks to Mr.Vinod Rai.Unless this trust is restored,any action of the government,perhaps, may not helpful to us.

from:  SANKARAN
Posted on: Aug 20, 2012 at 15:05 IST

In this article what the writer wanted to communicate is not clear. It is confusing.Is CAG right or wrong has not been spelt out clearly.

from:  Satyanarayana
Posted on: Aug 20, 2012 at 20:20 IST

I will tend to disagree with the author where he author dwells on the premise that the assumption is wrong in this case. With a pure commercial intent, the logic propounded by the author is right.to ensure the assumption is right, you could always have another set of hypothesis and prove it with logical induction to build a chain which reasonably proves the assumption is right. The point here is CAG is meant to ensure transparency and to ensure execution is done in a way which in the prevailing context, abilities of the executing body represents the most efficient use of public money and assets. The loss represents the loss of efficiency that could have been derived through a more approprate use of public assets- sepctrum. Please note that it may still not be the most efficient use. Auctions are most appropriate becos the process if done rght builds in sufficient safeguards,transparency besides building up competitive bidding to enhance value of assets auctioned.good auction is key

from:  Vishwanath
Posted on: Aug 22, 2012 at 05:56 IST
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