2G spectrum allocation was a total bankruptcy of any pretence of morality: Vinod Rai

The acquittal of all the accused in the 2G scam case by a trial court has once again put the spotlight on the controversial 2010 report by the Comptroller and Auditor General on losses due to the allocation of 2G spectrum. In this excerpt from his 2014 book titled ‘Not Just An Accountant’, the then CAG Vinod Rai writes about how the auditor came up with the contentious presumptive loss of Rs 1.76 lakh crore and its fallout. 

Mr Prime Minister, people wonder, if you were indeed convinced that spectrum allocation should be transparent, what prevented you from executing your wishes? Had you, in fact, stood steadfastly by your beliefs, the fate of UPA II might have been different. In fact, the fate of the Indian economy itself might have been very different.

Instead, you engaged in a routine and ‘distanced’ handling of the entire allocation process, in spite of the fact that the then communications minister, A. Raja, had indicated to you, in writing, the action he proposed to take. Insistence on the process being fair could have prevented the course of events during which canons of financial propriety were overlooked, unleashing what probably is the biggest scam in the history of Independent India.

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A. Raja succeeded Dayanidhi Maran as telecommunications minister in May 2007, both ministers being from the Dravida Munnetra Kazhagam (DMK) party. It was then that the process for spectrum allocation gathered momentum. Raja decided to continue with the internally adopted principle of first-come-first-served (FCFS) for the allocation of spectrum: every application received at the central registry section of the DoT would be assigned its priority based on its date of receipt. Raja was categorical, as evident in his correspondence with the PMO:

• he would follow the FCFS process;
• there would be no cap on the number of licenses in a service area;
• low tariff improved the reach and spread of services;
• suggestions of referring the allocation issue to the GoM were ‘totally out of context’.

So he was seemingly candid in wanting to decide the issue himself.

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It is obvious from the exchange of these letters that the prime minister was indeed aware of Raja’s intentions as far back as November/December 2007. He chose, for reasons which can only be speculated, to ignore the warning signals. He failed to direct his minister to follow his advice, the counsel of the ministries of law and finance, and the commerce minister Kamal Nath’s suggestion that the issue be brought to a GoM for threadbare discussion.

Why, and under what compulsion, did the prime minister allow Raja to have his way, which permitted a finite national resource to be gifted at a throwaway price to private companies—private companies that, going by the minister’s own admission, were ‘enjoying the best results […] which was also reflected in their increasing share prices’? If only Prime Minister Manmohan Singh had responded differently; if only he had instead said—‘I have received your letter of 26 December 2007. Please do not take any precipitate action till we or the GoM have discussed this.’ Such a letter would have changed the course of UPA II. It is for this reason that I have, at the outset, asserted that had the prime minister insisted on transparency, as he claimed on 3 January 2014, the course of political history of this county would have been different. But more on this later.

There were strong interjections from the ministry of finance that clearly felt that applying a price determined in 2001, without indexation, was inappropriate. However, this was brushed aside. Giving finite spectrum to a private party for commercial exploitation, even if it enhances teledensity, requires a balance between revenue generation and achieving social objectives. It needs to be emphasized that even the tenth five-year plan document on spectrum policy mentions that ‘pricing needs to be based on relative demand and supply over space and time in a dynamic manner, [with] opportunity cost to reflect the relative scarcity of the resource in a given situation. Thus, the action of the DoT to take a price discovered in 2001, when the sector was still nascent, and apply it after a passage of seven years in spite of changes in market conditions, and in the face of contrary advice from the PMO and the ministries of finance and law, certainly does not pass any test of transparency.

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The CAG’s performance audit process invited a lot of attention and criticism, to put it mildly, and not least for the so-called humongous figure that my team and I ‘conjured up out of nowhere’, establishing the loss to the national exchequer. There was and has been a lot of debate on why the CAG computed the potential or presumptive loss to the national exchequer.

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It wasn’t only the fact of calculating the loss, but also the methodology of computing it that attracted widespread attention. The formula applied for computing the loss was used after requisite deliberation, and based on a logical understanding of tax laws in India and abroad. The other option before the audit team was to use mathematical or econometric modelling. Such models are premised on certain assumptions, which may or may not hold true in real life market situations and would thus be vulnerable to criticism. Hence, the modelling methodology was given the go. Audit was also aware that too much was at stake for far too many important and influential people, and it could not take the risk of having its computation being vulnerable to the intense examination it was bound to be subjected to. It was thus decided to use data and other indicators which were already in the public domain.

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The avowed government policy of FCFS gave way to the process of auction for 3G allocation. This was completed on 31 May, 2010, and fetched the government handsome revenue. The rationale or logic of this comparison as a parameter for computing loss lies in the CAG taking note of TRAI’s report of 2010, wherein it stated that 2G licensees were, in fact, offering more than 2G capability: ‘While comparing spectral efficiency and other factors, it is fair to compare the existing 2.75G systems with 3G systems’. Hence, we compared the revenue accrual of 2G with that of 3G. And this brought us to the presumptive loss figure of Rs 1.76 lakh crore. These are merely indicative figures. They convey an order of magnitude. No doubt, the media and public imagination were captured by this figure, and the government got fixated on it.

In computing presumptive losses, we have clearly stated that while the fact of loss to the national exchequer can hardly be denied, the quantum of loss can be debated. We sincerely believe that the government itself validated our computations by debating the loss—from the now famous ‘zero loss hypothesis’ to the Rs 32,000 crore mentioned by the CBI.

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It is not often that CAG reports having such significant discoveries find their way into Parliament. Before putting out such startling conclusions one did deliberate for days. Issues such as whether the department was on firm ground in its findings, facts and figures repeatedly dogged us. What would be the reactions and the consequences? Obviously there would be a backlash. Would we be able to sustain ourselves and our point of view? I must state most categorically that the professional content in the department is superb. The officers are apolitical; their factual findings have been uncontested. We decided to take the plunge, as not doing so would have left all of us with a lifetime of remorse and guilt. What we had not factored in was the personal backlash that it brought forth. But then, it is a fact of life—if someone is hit, he will hit back only at his own level. We are not in the least repentant of our actions.

The final report was presented to Parliament on 16 November, 2010. That day, coincidentally, marked 150 years of the CAG’s existence. We had scheduled a major event at Vigyan Bhawan. The president of India and the prime minister were to participate. A reception was scheduled in the evening at the CAG’s official residence. For the evening reception, the prime minister regretted the invite, as did the president. This was the only reception at the CAG’s residence in any departmental officer’s memory, and that too, for a rare event. The president and the prime minister attend annual receptions at the residences of the directors of the intelligence bureau and the CBI every year. Surely, the Indian audit and accounts department could also do with some encouragement?

The prime minister arrived for the function at Vigyan Bhawan. He expressed to me his disagreements regarding our conclusions in the report. I mumbled my usual defence. He was visibly upset. Silence from my side was called for.

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The fact that the Supreme Court cancelled all 122 licenses is now history. The auction, as per the directions of the Supreme Court, was conducted in November 2012. Only Rs 17,343 crore was received as the bid amount from sale of spectrum in eighteen circles and a one-time fee. Newspapers reported that the government was indeed gleeful that the auction had flopped. Debunking allegations that the government was celebrating the failure of the auction to substantiate its zero loss theory, Sibal said, ‘We are sad with the situation. But the government is confident of garnering Rs 40,000 crore from spectrum sales as auction will continue for the unsold circles till March [2013] end’. However, the photographs that appeared in the papers when the three ministers held a press conference said it all. One quote read: ‘Poor response to 2G auction shows policy making should be left to the government’ (Kapil Sibal, information technology and communications minister). Another said: ‘The 2G scam of Rs 1.76 lakh crore is a myth’ (P. Chidambaram, finance minister). Soon the government completed about thirty rounds of e-auction for the allocation of 2G licenses for 900 and 1800 MHz in the four circles that had received no bids in the earlier auction. The amount the government netted was Rs 61,162 crore—close to the figure of Rs 67,000 crore indicated by the CAG, and one-and-a-half times beyond the government’s anticipation (as mentioned by Sibal). Yet, there was no excitement that the government had got a huge amount which would help plug its burgeoning fiscal deficit. There was no press conference by ministers to announce this huge amount the auction had mobilized.

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I have dwelt, indeed laboured on this particular case study, as it was the first in the unfolding of a series of misguided actions of a government that seemed to have forgotten its oath to preserve and protect the interests of the nation. It was not as if the primus inter pares or other members of the cabinet were not aware of what was happening; indeed, the whole nation was seized of it. Why then was the saga allowed to unfold? From day one, the attempt was to live in denial, to shoot the messenger, and if this wasn’t possible, to puncture the credibility of an organization that had withstood all possible scrutiny for 150 years. The now (in)famous conference, propounding the equally (in)famous ‘zero loss’ hypothesis was a precise attempt at doing just this—proclaiming that there was no malfeasance, and that the CAG had erred. Save a few committed journalists and fellow travellers—who could be counted on the fingers of one hand—none bought the myth.
This is a story that reflects a lack of probity. This is a story of the total bankruptcy of any pretense of morality. This is a story of the misguided belief that the underlying objective of all action is to remain in power, and keep a coalition secure—the nation and its people be damned.

Hence, this is a story worth narrating.

This excerpt has been published with permission from Rupa Publications.