Corruption


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Corruption

 

United Nations Convention against Corruption

  • 2003
  • First legally binding international anti-corruption instrument
  • Obliges its state parties to implement a wide and detailed range of anti-corruption measures affecting their laws, institutions and practices
  • India ratified it in 2011

To check corruption

Institutional Changes

  • A single, empowered Lokpal needs to be established. It should be empowered to investigate and prosecute politicians, bureaucrats and judges.
  • While CVC and CAG are independent, they are merely advisory bodies to the govt. They need to be strengthened. CVC can be merged with the institution of lokpal

Major corruption cases exposed in 2010

  • Commonwealth Games
  • 2G spectrum allocation
  • Adarsh Society Case, Maharashtra
  • Land Scam, Yeddurappa, Karnataka
  • LIC Housing Scam
  • <Niira Radia tapes>

Proposition: Corruption exists and is high

  • Report published by Global Financial Integrity showed that corruption, tax evasion and trade mispricing have cost India hundreds of billions of dollars over the past several years
    • The study pointed out that the process had gained momentum after the opening up of the economy in 1991

Issues

  • Increasing nexus between corporate and politics: A rise in corruption could be attributed to this nexus. Corporates are trying to manipulate government in multiple ways to have their way in business <ref. 2G spectrum and Radia tapes>

Dealing with the issues

  • We need a truly independent CBI to get to the bottom of the cases.
    • Right now, CBI seems to be manipulable by the political masters.
    • In the 2G case, SC is directing CBI. One possibility could be to make CBI answerable to the judiciary instead of the executive to enhance its independence.

4th ARC report on Ethics in Governance has recommended a large number of measures which could enhance probity among public servants

  1. Amendment of the Prevention of Corruption Act
  2. Delegating powers to grant sanction of prosecution to an empowered committee
  3. Fixing time limit for trial of anti-corruption cases
  4. enhancing powers of the CVC
  5. Repeal article 311
  6. Creating a multi-member Lokayukta
  7. Simplifying disciplinary procedures
  8. Creating mechanism which can empower citizens to seek legal relief against fraudulent claims against the government
  9. Confiscation of property acquired by corrupt means
  10. Ensuring accessibility and responsiveness of government functionaries
  11. Adopting measures to protect honest civil servants

Serious Fraud Investigation Office (SFIO)

  • Under the ministry of corporate affairs
  • For detecting and prosecuting or recommending for prosecution white-collar crimes/frauds

Corporate corruption

  • Insider trading: Rajat Gupta, Rajaratnam
  • KG Basin: Reliance
  • Niira Radia tapes
  • Satyam

India’s Black Economy

  • In late 2010 and early 2011 there was a huge outcry regarding India’s black economy as news about secret foreign bank accounts of Indians started pouring in.
  • In addition, the Global Financial Integrity Report claimed that independent India had lost $462 bn due to illegal financial outflow
  • The government was pulled up by the SC to disclose the names of individuals who had funds stacked away in foreign banks
  • To deal with the issue, India inked Tax Information Exchange Agreement (TIEA) with five ‘tax-havens’ by March 2011. These are: Bahamas, Isle of Man, British Virgin Islands, Caymen Islands and Bermuda
    • Purpose of TIEA is to promote international cooperation in tax matters through exchange of information.
  • Wanchoo committee
    • 1971
    • Estimated the size of black economy
  • Reasons for Black money <can divide it into pre liberalisation and post liberalisation>
    1. Structure of taxation
    2. Price control policy
    3. Quota and license system
    4. Scarcity of commodities
    5. General election
    6. Share market
    7. Real estate
    8. International Activities
    9. Privatisation
    10. Police force
  • Impact of black money
    • May remain idle or often gets invested in unproductive activities
    • Deprives govt of the tax revenue
  • How to curb it
    • Special courts should be established to dispose the corruption cases
    • Pranab Mukharjee’s five pronged approach: joining the global crusade against black money; creating an appropriate legislative framework; setting up institutions for dealing with illicit funds; developing systems for implementation; and imparting skills to the manpower for effective action

Devil’s advocate

  • Some people argue that black economy also generates jobs and production
    • A lot of goods are bought in the market using black incomes, and that leads to increase in production and employment
    • Black economy generates informal sector employment and helps the poor
    • Some argue for bribes as speed money
  • There is some truth in these claims but the costs of black economy exceed its benefits.

Counterattack for those who justify black money

  • Speed money: In order to extract a bribe, the bureaucracy first slows down work and harasses the public. If work was automatically done, why would anyone pay bribes?
  • The administration becomes rundown since rather than devising ways to work efficiently, it is busy thinking of ways to make money by setting up roadblocks to efficient functioning.
  • Much of black economy in India is like ‘digging holes and filling them’. Activity without productivity.
  • Because of the growing black economy, policies fail both at the macro-level and the micro-level.
  • The flight of capital lowers the employment potential and the level of output in the economy
  • The direct and indirect costs are of policy failures, unproductive investments, slower development, higher inequity, environmental destruction and a lower rate of growth of the economy
  • At the social level, the cost is a loss of faith in society and its functioning.

Various committees on corruption

  • 1956: Kaldor Report
  • 1964: Santhanam Committee
  • 1971: Wanchoo Committee
  • 1979: Dagli Committee
  • 1985: NIPFP Report
  • 2002: Kelkar Committee

Movements Against Corruption

  • 1972: Nav Nirman
  • 2011: Anna movement

Lokpal Bill

 

Major differences between the Lokpal and Jan Lokpal drafts

  Jan Lokpal Lokpal
Selection Panel Two elected politicians, four serving judges and two independent constitutional authorities Six elected politicians (five from the ruling establishment), two serving judges and two officials.
Search committee <this is a body to ensure countrywide search and co-option in a transparent manner of the best talents in the country> 10 members: 5 from former senior judiciary, CAG and CEC, and five to be co-opted from the civil society No such provision for accommodating the representatives from the civil society
Investigation After a preliminary enquiry the accused is associated for questioning or interrogation as per the law – not prior hearings to share his defence or self-incrimination. He produces his defence before the judicial courts as is under the law. Enquiry – > report to Lokpal -> hearing of the accused -> investigation -> one more hearing before the final chargesheet.

 

Team Anna’s demands

  • Selection of the Lokpal be done by a committee as proposed in the Jan Lokpal bill
  • Provision of Lokayuktas in the states to deal with public servants of the state. <Creation of Lokayukta is within the purview of the state governments. For the parliament to pass a law to force them to do so, might seem to go against the principles of federalism>
  • Wide jurisdiction of the Lokpal
  • Put in place a grievance redressal system

There were six major areas of differences between the government and the Jan Lokapal bill

  1. Should one single Act be provided for the Lokpal in the centre and Lokayukta in the states? Would the states be willing to accept a draft provision for the Lokayukta on the same lines as that of the Lokpal?
  2. Should the PM be brought under the Lokpal? If so, should there be a qualified inclusion?
  3. Should judges of the SC/HC be brought within its purview?
  4. Should the conduct of MPs in Parliament be brought within the purview of the Lokpal?
  5. Whether Articles 311 and 320(3)(c) of the constitution notwithstanding members of a civil service be subject to enquiry and disciplinary action including dismissal by the Lokpal/Lokayukta, as the case may be?
  6. What should be the definition of the Lokpal, and should it itself exercise quasi-judicial powers also or delegate these powers to its sub-ordinate offices?

Report of parliamentary standing committee on Lokpal

  • Recommended
    • Exclusion of lower bureaucracy from purview of Lokpal
    • Parliament to decide whether PM should be included
    • Group C and D officers should be covered by the respective state Lokayuktas or by the CVC at the central level

 

Role of CAG

Following cases of scam were brought forth recently by CAG

  • 2G spectrum
  • CWG
  • Reliance KG Basin

In order to make the institution of CAG more robust, it has proposed the following amendments to the Audit Act 1971:

  • Amendment to ensure that the government departments reply to audit enquiries in 30 days rather than in the open-ended manner as of now.
  • CAG wants the statute to stipulate a clear timeframe for the tabling of completed audit reports on the floor of the relevant legislature.
  • Bringing the CAG’s legal mandate up to speed with the changes that have taken place in the way public money is spent. Because of ambiguities in its mandate the CAG feels unable to adequately audit all areas of public economic activity. <eg, the new institutions after the 73rd and 74th amendment, public-private partnerships after liberalisation>
  • Adapt audit approach to keep pace with the latest fiscal developments.
  • Types of audit
    • Regulatory Audit: CAG’s current function. Auditing whether the money used was legally available and spent through the right authority.
    • Performance Audit: looking at the economy and appropriateness of spending. Could the spending be done in a more efficient manner to get the maximum returns out of the expenditure?
  • Good opportunity for CAG to have a proactive role in many areas including:
    • Poor implementation of the FRBM Act 2003 and obsession with showing achievement of quantitative budget deficit with the help of revenue buoyancy and one time receipt like spectrum auction
    • 13th finance commission has suggested a review mechanism to be set up for evaluating the fiscal reform problems. CAG can contribute valuable inputs for this reform process.
    • Output and outcome budgeting: Need to move from the former to the latter. CAG can do some case studies of output/outcome budgeting and focus on the system defects for corrective action. Introduction of management accounting was one of the goals when audit was separated from accounts in 1976. This is still a paper goal and accounts are still considered by the ministries as a statutory nuisance.
  • Some examples of lack of transparency in government finances
    • Govt’s contingent liabilities shown in the budget document do not indicate the default position of the borrowers.
    • The figures of fiscal deficits need more amplification. Quasi-fiscal deficit should be explicitly stated. Many cases of understatement of expenditure are noticeable. For example, oil subsidies do not reflect the full annual subsidy payable by the government.

150 Years of CAG in 2010

An evaluation

  • 1860
  • The findings of Audit should not only be reported to the President and Parliament as close to the events as possible, but also made known simultaneously to the media and public, with some explanations to aid understanding
  • Several reports of the CAG have matters that have not been discussed. A way should be devised so that CAG reports are more effectively discussed
  • There is a criticism of overreach when Audit widens its horizons and attempts to examine efficiency or cost-effectiveness or propriety. The criticism is untenable because any meaningful audit must necessarily go into these aspects, and the supreme audit institutions of many countries do as a matter of course.
  • When faced with executive intransigence, the CAG does not have enough powers to compel cooperation. The CAG needs to take a lead in using the relevant constitutional provisions to make the institution stronger
  • The process of selection of such an important constitutional functionary should be open, objective and credible.

 

Beyond the spectrum

The enormity and complexity of government budget throw a special burden on CAG

The Comptroller and Auditor General of India (CAG) has been in limelight recently for his report on the irregularities and loss of revenue to the Central Exchequer in allotment of spectrum licences. Public awareness and appreciation of the role of CAG, especially in the media, is to be welcomed.

As the supreme auditor of the government, it is his responsibility to check that collection of revenue and spending of public money is done properly according to rules and regulations. It is a creditable achievement to unravel all the ramifications of this complex transaction and bring out a comprehensive report without fear or favour. This is time to recognise the wider role CAG can play in the larger context of economic development and fiscal consolidation.

On behalf of Parliament and the public, CAG is responsible to check that public revenue is collected and public expenditure is incurred in the most efficient and lawful manner. India is a welfare state and the government is implementing a number of schemes and projects under the five-year plans, resorting to borrowing. The enormity and complexity of government budget throws a special burden on CAG. The budget estimate of revenue receipts for the current year is Rs.6.80 lakh crore and total expenditure Rs.11 lakh crore financed through substantial borrowing. The CAG’s role extends to see that the budget is implemented to achieve the government’s objective of promoting development with fiscal prudence. Two areas for such non-routine audit can be identified — ouput/outcome budget and fiscal responsibility legislation.

One major factor in public expenditure of a modern welfare state is the wide range and complexity of functions, schemes and projects undertaken by the government to promote all inclusive economic growth. This has altered the budget formulation in a significant way. The budget is no longer a mere financial budget. Now the emphasis is on what is expected from the large scale spending. Efficiency and effectiveness became the key words. The physical output from the financial input is reflected in the budget. The country has followed this world-wide trend by introducing budgetary reforms. The annual performance budget was introduced to highlight financial and physical aspects of major schemes and programmes of all ministries dealing with development activities. Even after 25 years, this did not bring any significant improvement in efficiency and effectiveness in public expenditure. Presenting the Central budget for 2005-06, the then Finance Minister announced putting in place a mechanism to measure the development outcomes of all major programmes to ensure that “programmes and schemes are not allowed to continue from one Plan period to another without an independent and in-depth evaluation.”

Outcome budget

The output/outcome budget is a complex task. It involves the following criteria.

Defining and measuring the output and the outcome from expenditure.

The output refers to physical measure of production and the outcomes deal with the effect of the policy and impact (Example: assets from expenditure on irrigation projects are dams and canals and the outcome is the increase in crop production and the efficient use of water. School and hospital buildings are the assets to be completed within timeframe and cost estimates, but the outcome is the quality of education and medical care).

Realistic cost assumptions to link financial budget provision with targeted output/outcome;

Designing a suitable system of financial and physical data;

System for internal check, monitoring and corrective action when needed; and

Presenting an annual analytical statement — comparing the actual financial and physical performance with that of budget estimates and targets.

If the new outcome budget is to fare better than the earlier performance budget and become a practical management tool, a special CAG audit of a few select cases will throw up the problems in adhering to the criteria mentioned above and any system weakness.

Omission of substantial non-Plan expenditure such as operation of schools, hospitals, irrigation projects from the output/outcome budget is a major flaw.

Expenditure on public private partnership (PPP) and direct transfer of funds to non-government bodies do not come under this output/outcome discipline. CAG can marshal data to draw attention to this lacuna in expenditure management.

Fiscal prudence

Another important subject for the audit scanner is action or rather non-action to inculcate fiscal prudence in government expenditure. A historic landmark in fiscal history is the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, by Parliament. It prescribes targets and ceilings for the budget deficits and thereby borrowings by government to finance expenditure. This is a commendable and timely legislation to control spending on non-priority and non-productive areas by taking loans. It also calls for a long-term view of fiscal prudence and sustainable public debt through Medium Term Fiscal Plan (MTFP) beyond the annual budget. But the implementation of this Act suffers from serious defects. Achievement of quantitative deficit targets is taken an end in itself and not as a means for achieving fiscal prudence. Deficit management has been done with the help of buoyancy in revenue, especially through disinvestment and revenue from spectrum auctions, off budget items and other means. Reform in expenditure policy and management has been put on the backburner. The MTFP presented with the annual budget is not supported by disaggregated data on revenue and expenditure projections and the underlying assumptions. There is no road map based on identification of the numerous specific problems in budget formulation, revenue mobilisation and expenditure policy and implementation with a time-bound action plan. An in-depth special audit by CAG of the implementation of the FRBM Act will be timely. CAG has the power and access to data for doing this. The Comptroller and Auditor General can recruit any technical staff needed for this non-routine audit (already an officer of Indian Economic Service has been taken on deputation). If this audit is done with a proper perspective, it can dispel the mistaken negative impression of audit as only a fault finder of individual irregularities.

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