Where the CAG presumes too much

A number was always going to trigger 'loss generating' political reactions

The law of unintended consequence. I am sure the CAG did not intend for the country to suffer the "presumptive loss" that its report on coal mining has generated. An estimate of the "loss" caused by the disruption in Parliament, the delays in the legislation of important economic reform bills, a further volley of international bad press and the deepened loss of investor confidence in political and economic governance, is clearly not possible but it will be significant. The CAG has inter alia the responsibility to audit the accounts of the exchequer and to evaluate whether the collection and allocation of revenue has been optimised. Towards that objective, it has the right to subject policy to audit scrutiny. The CAG does not however have the mandate to make policy and/ or to supervene in its implementation. It has therefore done right by bringing to the notice of Parliament the likelihood that the delays in the implementation of the recommended policy to allocate coal blocks through competitive bidding have led to potentially a revenue loss. It has done wrong by putting a number to this loss. The reason is that it is not sensible to try and fix the value of natural resources. Also by citing the headline grabbing number of Rs 1,86,000 crore, which by its own admission is an estimate based on averages, it has opened a Pandora's box.

Exploration and production of oil, gas and coal confront three uncertainties and one twist. The uncertainty that a particular geology contains hydrocarbons; the uncertainty that the resources can be located and the uncertainty that once located the resources can be sustainably and commercially produced. The twist is the price. Coal confronts less uncertainty than oil or gas because it is more easily identifiable and the production process is less complex. It faces, however, a comparable price twist. This is because, like oil or gas, it is an essential fuel and its price is determined by the government. Thus, for instance, the price of coal sold by Coal India to merchant power plants is set below market levels because the State Electricity Boards are financially distressed and cannot afford market-based power tariffs. On the other hand, the price to manufacturers like steel is based on market forces. Similarly, the price of gas currently produced from the KG D6 basin by the Reliance-BP consortium is fixed at US$4.20/ mmBtu. This is well below the import parity price of around US$12/ mmBtu. The reason is to provide affordable fuel for power generation and fertiliser production.

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