Political Economy

In Kerala, a CAG Report Kicks up Political Controversy and More

While the Opposition has blamed Thomas Isaac for leaking the report, the state minister has argued that the national auditor is ‘waging a proxy war’ against Kerala.

Addressing the press last week, Kerala finance minister Thomas Isaac vehemently argued that the Comptroller and Auditor General (CAG)  had incorrectly blamed the state’s infrastructure financing body – the Kerala Infrastructure Investment Fund Board (KIIFB) – for having a borrowing model that was “unconstitutional”. 

While he didn’t read out any lines or paragraphs from the said audit report, Isaac claimed that his concerns emerged from the national auditor unfairly targeting the KIIFB in its “draft audit report” and that in doing so it was ‘waging a proxy war’ against the state.

In March 2019, the KIIFB took the route of external commercial borrowing by launching a public issue of Masala Bonds at the London Stock Exchange. Such external commercial borrowing usually comes along with a sovereign guarantee by the governments. 

KIIFB borrowings

While Kerala became the first state government to access the market borrowing overseas by appealing to its diaspora, in the past other states had evinced plans to raise the money for infrastructure projects in a similar fashion. 

For instance, in the early 1990s, Sardar Sarovar Narmada Nigam Limited was planning to float bonds to raise the money from Gujarati diaspora for the controversial Narmada dam project, after the World Bank withdrew financing of the project. Eventually, however, this state PSU developed cold feet on those ambitions and launched Deep Discount Bonds in the domestic financial market. 

Delays in tabling of audit reports

But perhaps what is most surprising is that in November 2020, a finance minister told mediapersons that he was referring to a draft audit report pertaining to the fiscal year ending March 31, 2019, and no eyebrows were raised why an audit report for FY19 should be in draft stage as late as in mid-November of 2020! If the finance minister’s words are to be believed, it means that an audit report was still in the draft stage, 19 months after the closure of the financial year!

But perhaps this seemed believable due to the sad state of affairs at the national auditor, as The Wire has deeply reported on

In particular, the general delays in finalising audit reports by former CAG of India Rajiv Mehrishi (whose tenure came to an end earlier this year) resulted in not a single audit report for the state pertaining to the fiscal year 2018-19 entering public domain till now. Two audit reports were tabled in the state assembly in a single day session convened on August 24, earlier this year. However, both the audit reports were pertaining to the fiscal year 2017-18.

Also read: Kerala Gold Smuggling: ‘Leaked’ Audio Spurs Allegations of ED Bid to Coerce Testimony Against CM

Back to the controversy

In response to Isaac’s remarks, Congress leader V.D. Satheesan filed a breach of privilege motion against the finance minister for having revealed the contents of a CAG audit report that has still not been tabled in the assembly. The speaker has issued the notice to the minister and Isaac has given statements expressing his confidence that “if there is something procedurally wrong, I’m willing to face the music.” 

How strong is the legal ground that Isaac stands on? There have been many instances in the past when the contents of yet-to-be-tabled audit reports have been published in the media. There have also been examples of audited entities trying to stall performance audits by approaching the courts and thus indirectly leaking that an adverse report is in the offing. For example, the Delhi high court had restrained the media, while hearing the petition filed by private electricity distribution companies, from reporting about the CAG’s performance audit on electricity distribution companies in Delhi

However, while media was restrained from reporting on that CAG audit report since it was not yet tabled, in a similar instance, the Delhi high court did not restrain from filing of the yet to be tabled CAG audit report as an “evidence on record” while hearing a petition on the Delhi Building and Construction Workers’ Welfare Board, without bothering that the state assembly had not yet witnessed the presentation of the same.

Indeed, the larger and more important point is that while Kerala opposition leader Ramesh Chennithala and Public Accounts Committee chairperson V.D. Satheesan were quick to raise objections that Isaac had breached the privilege of the assembly by talking about an audit report before its presentation to the assembly, none of them have spoken a word, including the honourable finance minister Isaac, about irreparable damage caused to the auditing cycle by the former CAG.

The CAG office at New Delhi.

New twist

More surprises in the CAG controversy came two days later, when a press statement from the CAG of India office in Thiruvananthapuram dated November 11 was made public:

“The State Finance Audit Report of the Comptroller and Auditor General of India for the year ended March 2019 containing observations on matters arising from examination of Finance Accounts and Appropriation Accounts of the State Government for 2018-19 has been forwarded to State Government on 06.11.2020.” 

Ideally, this press statement – which clarifies that the report is not a ‘draft’, but is final – ought to have been issued by the office of the principal accountant general (PAG) on the evening of November 6 itself and most newspapers from Kerala’s state capital ought to have carried the news the following morning.

It is unclear why the office of PAG waited – till the point where the finance minister had gone to the town with his efforts to clarify the state government’s position on audit remarks – when it could have been communicated with the national auditor during the process of auditing cycle.

In India, the national audit process is not unilateral. At every stage, the audited entity gets the inspection reports prepared by the audit team to furnish the reply to audit queries as well as objections/observations. But while an audited entity gets the right to reply, it is ultimately the CAG’s prerogative to inform India’s citizens as to whether the reply filed is tenable or not. 

Isaac has alleged that the CAG “inserted four pages later” and these additional paragraphs that were inserted after the submission of the draft report were not furnished to KIIFB and the state government, thereby denying them the right to reply.

After the CAG’s press statement was made public, it became clear that the report carrying the remarks which are at the root of the current spark is from the audit report on state finances for the financial year 2018-19 – not from a performance audit on KIIFB that has been in the draft stage for some time. 

Also read: The Political Life of Kodiyeri Balakrishnan, Who Stepped Down as CPI(M) Kerala Secretary

Perhaps referring to that ongoing performance audit, state finance minister Thomas Issac in his statements mentioned that 76 queries during the audit were raised by the CAG, and replies were filed to each of them by KIIFB. For a fiscal year, usually there are at least six different CAG  reports on Kerala that get prepared. These are on (i) state finances (ii) economic sector (iii) general and social sector  (iv) revenue receipts (v) PSUs and (vi) local self government institutions.

A reference to KIIFB in a State Finances audit report couldn’t have been as detailed as the finance minister is describing it to be — especially when compared to a report on Kerala (Economic Sector), where comments on KIIFB can take an entire chapter, or if there is a very detailed performance audit finding where the office of PAG can even decide to bring out a stand alone volume on KIIFB. The other five audit reports on Kerala would also be at a fairly advanced stage in the audit process, given we are talking in the twentieth month from the closure of the fiscal year.

The finance minister has also talked about working on a 100-page reply to the CAG on the performance audit of KIIFB, but it is still not known if the exit conference on that performance audit report on KIIFB has taken place or not. In the case of performance audits, the last chance to air the views that the audited entity gets is exit conference, where the audit team makes a presentation about audit findings and gathers the replies from the audited entity and state government.

Broader issues

The CAG audit of KIIFB has been a contentious issue in the state, with the government agreeing to the audit under section 14(1) of the CAG (Duties, Powers and Conditions of Services) Act, 1971 – but objecting to the demand for audit being carried under section 20(2) of the Act. However, the CAG audit reports on state finances have made remarks on KIIFB in the past as well. 

As per the CAG audit report on state finances for the year ending March 2016, KIIFB was one of the six autonomous bodies/authorities which did not furnish the annual accounts due up to 2014-15. The audit report brought to notice that the accounts of KIIFB for the period between 2008-09 to 2014-15 were not received while the due date for submission of accounts is September 30 of the succeeding year.

In an interview with the New Indian Express, Isaac has already stated that the “CAG report will be rejected by the assembly. Neither the assembly nor the PAC (Public Accounts Committee) will accept such a report.” 

As such, the executive is bound to table the report in the assembly. It may choose to vociferously defend its position and can come down all guns blazing on the audit report but, the prerogative of picking it up for discussion remains with the Public Accounts Committee.

The controversy doesn’t appear to die down very soon and while KIIFB appears to battle it out through a series of social media posts, it remains to be seen how vociferous would be the next assembly session in Kerala, once the exact audit findings is read by legislators and citizens when the CAG audit report on state finances gets tabled.

Himanshu Upadhyaya is an assistant professor at Azim Premji University Bangalore. Abhishek Punetha is an independent researcher and former Girish Sant Memorial Fellow.