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Minefield

22 March 2012 By Jeff Glekin

The toothpaste is well and truly out of the tube in India’s coal saga. The authors of a leaked official study into the sale of mines are desperately trying to retract the whopping figure of $211 billion in lost revenue. But there is no way this news will go up in smoke.

When the history of the Manmohan Singh government is written, there’ll need to be a chapter on the role of the national audit office, the Comptroller and Auditor General (CAG). It was its report in the 2G telecoms scam, which is estimated to have cost a mere $39 billion, which led the Supreme Court to cancel 122 licences. Now the CAG is at it again.

The government can debate the size of the loss. What’s clear, though, is that between 2004 and 2009 natural assets were sold below market price. So far, no one has suggested that the allocation was corrupt, just that the process was inept.

There are economic lessons to learn. Market pricing of state resources can bring higher revenues whilst reducing the scope for graft. The price of power may rise as a result, but the government can use part of the extra revenue to give targeted subsidies for a limited time to the most vulnerable. The rest could be redeployed for better uses – say, modernising India’s creaking infrastructure.

Then, there’s a legal dimension. The Supreme Court’s 2G ruling said that all state resources must be sold by auction. The 155 mines the government flogged clearly were not. That opens the way for litigation which will create havoc for India’s power sector.

Finally, there’s the political fallout. The government needs this saga like a hole in the head. A mid-term election is still unlikely, because neither the opposition parties nor the Congress Party’s coalition partners are ready to push the knife in. They’d rather see Congress squirm and use the time to prepare for an election in 2014. But this fiasco further weakens Singh and suggests two more years of policy paralysis are now likely. Just the opposite of what India, with its flagging growth rate, needs.

 

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