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
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.
4
th
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
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 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
Table 1
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 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 74
th
amendment, public-private partnerships after liberalisation>
Adapt audit approach to keep pace with the latest fiscal developments.
Types of audit
o 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 13
th
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.
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.