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 anticorruption 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
o 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.

o Right now, CBI seems to be manipulable by the political masters.
o 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 whitecollar crimes/frauds
Corporate corruption
Insider trading: Rajat Gupta, Rajaratnam
KG Basin: Reliance
Niira Radia tapes
Satyam

Indias Black Economy

In late 2010 and early 2011 there was a huge outcry regarding Indias
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
o Purpose of TIEA is to promote international cooperation in tax
matters through exchange of information.

Wanchoo committee
o 1971
o 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
o May remain idle or often gets invested in unproductive activities
o Deprives govt of the tax revenue
How to curb it
o Special courts should be established to dispose the corruption cases
o Pranab Mukharjees 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

Devils advocate

Some people argue that black economy also generates jobs and
production
o A lot of goods are bought in the market using black incomes, and
that leads to increase in production and employment
o Black economy generates informal sector employment and helps
the poor
o 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 macrolevel 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:
1964:
1971:
1979:
1985:
2002:

Kaldor Report
Santhanam Committee
Wanchoo Committee
Dagli Committee
NIPFP Report
Kelkar Committee

Movements Against Corruption

1972: Nav Nirman
2011: Anna movement

Lokpal Bill
Major differences between the Lokpal and Jan Lokpal drafts
Table 1

Selection Panel

Search committee <this

is a body to ensure
countrywide search and
co-option in a
transparent manner of
the best talents in the
country>
Investigation

Jan Lokpal
Two elected politicians,
four serving judges and
two independent
constitutional authorities
10 members: 5 from
former senior judiciary,
CAG and CEC, and five to
be co-opted from the civil
society

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.

Lokpal
Six elected politicians
(five from the ruling
establishment), two
serving judges and two
officials.
No such provision for
accommodating the
representatives from the
civil society

Enquiry - > report to

Lokpal -> hearing of the
accused -> investigation
-> one more hearing
before the final
chargesheet.

Team Annas 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

<Nov 10, 2011>

Recommended
o Exclusion of lower bureaucracy from purview of Lokpal
o Parliament to decide whether PM should be included
o 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 CAGs 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 73 rd and 74th
amendment, public-private partnerships after liberalisation>
Adapt audit approach to keep pace with the latest fiscal developments.
Types of audit

Regulatory Audit: CAGs current function. Auditing whether the

money used was legally available and spent through the right
authority.
o 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:
o 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
o 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.
o 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
o Govts contingent liabilities shown in the budget document do not
indicate the default position of the borrowers.
o 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.
o

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 worldwide 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 nonproductive 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.