US-GAAP AND Indian-GAAP

Created By : Kanupriya Keshan 

Some of the major differences between US GAAP and Indian GAAP are:

1.              Underlying assumptions: 

Under Indian GAAP, Financial statements are prepared in accordance with the principle of conservatism which basically means “Anticipate no profits and provide for all possible losses”. Under US GAAPconservatism is not considered, if it leads to deliberate and consistent understatements.

2.              Prudence vs. Rules:

 ICAI  has been structuring Accounting Standards based on the International Accounting Standards ( IAS) , which employ concepts and `prudence' as the principle in contrast to the US GAAP, which are  "rule oriented", detailed and complex. It is quite easy for the US accountants to handle issues that fall within the rules, while the International Accounting Standards provide a general framework of accounting standards, which emphasise "substance over form" for accounting. These rules are less descriptive and their application is based on prudence.

3.              Format/ Presentation of Financial Statements: 

Under Indian GAAP, financial statements are prepared in accordance with the presentation requirements of Schedule VI to the Companies Act, 1956. On the other hand, financial statements prepared as per US GAAP are not required to be prepared under any specific format as long as they comply with the disclosure requirements of US GAAP.

4.              Consolidation of subsidiary companies: 

Under Indian GAAP (AS 21), Consolidation of Accounts of subsidiary companies is not mandatory. AS 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21. Thus, the  financial income of any company taken in isolation neither reveals the quantum of business between the group companies nor does it reveal the true picture of the Group. Under US GAAP (SFAS 94), Consolidation of results of Subsidiary Companies  is mandatory, hence eliminating  material, intercompany transaction  and giving a true picture of the operations and Profitability of the various majority owned Business of the Group.

5.              Cash flow statement: 

Under Indian GAAP (AS 3) , inclusion of Cash Flow statement in financial statements is mandatory only for  companies whose share are listed on recognized stock exchanges and Certain enterprises  whose turnover for the accounting period exceeds Rs. 50 crore. Thus, unlisted companies escape the burden of providing  cash flow statements as part of their financial statements. On the other hand, US GAAP (SFAS 95) mandates furnishing of cash flow statements for 3  years – current year and 2  immediate preceding years irrespective of whether the company is listed or not .

6.              Investments: 

Under Indian GAAP (AS 13), Investments are classified as Current and Long term. These are to be further classified Government or Trust securities, Shares, debentures or bonds Investment properties others-specifying nature. Investments classified as current investments are to be carried in the financial statements at the lower of cost and fair value determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis. Investments classified as long term investments are  carried in the financial statements at cost. However, provision for diminution is to be  made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.  Under US GAAP (SFAS 115), Investments are required to be segregated in 3 categories i.e. held to Maturity Security (Primarily Debt Security) , Trading Security and Available for sales Security and should be further segregated as Current or Noncurrent on Individual basis.  Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealised gains and losses included in earnings. All Other securities  are classified as available-for-sale securities and reported at fair value, with unrealised gains and losses excluded from earnings and reported in a separate component of shareholders' equity.

7.              Depreciation: 

Under the Indian GAAP, depreciation is provided based on rates prescribed by the Companies Act, 1956.  Higher depreciation provision based on estimated useful life of the assets is permitted, but must be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation cannot be provided at a rate lower than prescribed in any circumstance. Similarly , there is no compulsion to provide depreciation at a higher rate, even if the actual wear and tear of the equipments is higher than the rates provided in Companies Act. Thus , an Indian Company can get away with providing with lesser depreciation , if the same is in compliance to Companies Act 1956. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out.

8.              Foreign currency transactions:  

Under Indian GAAP(AS11) Forex transactions (Monetary items) are recorded at the rate prevalent on the transaction date. Year end foreign currency assets and liabilities (Non Monetary Items) are re-stated at the closing exchange rates. Exchange rate differences arising on payments or realizations and restatements at closing exchange rates are treated as Profit /loss in the income statement.   Exchange fluctuations on liabilities incurred for fixed assets can be capitalized. Under US GAAP (SFAS 52), Gains and losses on foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity. Capitalization of exchange fluctuation arising from foreign liabilities incurred for acquiring fixed assets does not exist. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place . US GAAP also permits use of Average monthly Exchange rate for Translation of Revenue, expenses and Cash flow items, whereas under Indian GAAP, the closing exchange rate for the Transaction date is to be taken for translation purposes.

9.              Expenditure during Construction Period: 

As per the Indian GAAP (Guidance note on ‘Treatment of expenditure during construction period' ) , all incidental expenditure on Construction of Assets during Project stage  are accumulated and allocated to the cost of asset on completion of the project. Contrary to this, under the US GAAP (SFAS 7), such expenditure are  divided into two heads – direct and indirect. While, direct expenditure is accumulated and allocated to the cost of asset, indirect expenditure is charged to revenue.

10.          Research and Development expenditure: 

Indian GAAP (AS 8)   requires research and development expenditure to be charged to profit and loss account, except equipment and machinery which are capitalized and depreciated. Under US GAAP (SFAS 2)  , all R&D costs are expenses except intangible assets purchased from others and Tangible assets that have alternative future uses which are capitalised and depreciated or amortised as R&D Expense. Under US GAAP, R&D expenditure incurred on software development is expensed until technical feasibility is established (SOP 81.1). R&D Cost and software development cost incurred under contractual arrangement are treated as cost of revenue.

11.          Revaluation reserve : 

Under Indian GAAP, if an enterprise needs  to revalue its asset due to increase in cost of replacement and provide higher charge to provide for such increased cost of replacement, then the Asset can be revalued upward and the unrealised gain on such revaluation can be credited to Revaluation Reserve ( Guidance note no 57). The incremental depreciation arising out of higher book value may be adjusted against the Revaluation Reserve by transfer to P&L Account. However for window dressing some promoters misutilise this facility to hoodwink the shareholders on many occasions. US GAAP does not allow revaluing upward property, plant and equipment or investment.

12.          Long term Debts: 

Under US GAAP, the current portion of long term debt is classified as current liability, whereas under the Indian GAAP, there is no such requirement and hence the interest accrued on such long term debt in not taken as current liability.

13.          Extraordinary items, prior period items and changes in accounting policies: 

Under Indian GAAP (AS 5) , extraordinary items, prior period items and changes in accounting policies are disclosed without netting off for tax effects . Under US GAAP (SFAS 16) adjustments for tax effects are required to be made while reporting the Prior period Items.

14.          Goodwill: 

Under the Indian GAAP goodwill is capitalized and charged to earnings over 5 to 10 years period. Under US GAAP (SFAS 142), Goodwill and intangible assets that have indefinite useful lives are not amortized, but they are tested at least annually for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit.

15.          Capital issue expenses: 

Under the US GAAP, capital issue expenses are required to be written off when incurred against proceeds of capitals, whereas under Indian GAAP, capital issue expense can be amortized or written off against reserves.

16.          Proposed dividend: 

Under Indian GAAP, dividends declared are accounted for in the year to which they relate. For example, if dividend for the FY 1999-2000 is declared in Sep 2000, then the corresponding charge is made in 2000-2001 as below the line item. Contrary to this, under US GAAP dividends are reduced from the reserves in the year they are declared by the Board. Hence in this case under US GAAP, it will be charged Profit and loss account of 2000-2001 above the line.

17.          Investments in Associated companies: 

Under the Indian GAAP (AS 23), investment in associate companies is initially recorded at Cost using the Equity method whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The consolidated statement of profit and loss reflects the investor’s share of the results of operations of the investee is carried at cost. Under US GAAP (SFAS 115) Investments in Associates are accounted under equity method in Group accounts but would be held at cost in the Investor’s own account.

18.          Preoperative expenses: 

Under Indian GAAP, (Guidance Note 34 - Treatment of Expenditure during Construction Period), direct Revenue expenditure during construction period like Preliminary Expenses, Project related expenditure are allowed to be Capitalised.  Further, Indirect revenue expenditure incidental and related to Construction is also permitted to be capitalised. Other Indirect revenue expenditure not related to construction, but since they are incurred during Construction period are treated as deferred revenue expenditure and classified as Miscellaneous Expenditure in Balance Sheet and written off over a period of 3 to 5 years. Under US GAAP (SFAS 7), the concept of preoperative expenses itself doesn’t exist. SOP 98.5 also madates that all Start up Costs should be expensed. The enterprise has to prepare its balance sheet and Profit and Loss Account as if it were a normal running organization.  Expenses have to be charged to revenue and Assets are capitalised as a normal organization.  The additional disclosure includes reporting of cash flow, cumulative revenues and Expenses since inception. Upon commencement of normal operations, notes to Statement should disclose that the Company was but is no longer is a Development stage enterprise. Thus, due to above accounting anomaly, Accounts prepared under Indian GAAP, contain higher charges to depreciation which are to be adjusted suitably under US GAAP adjustments for indirect preoperative expenses and foreign currencies.

19.          Employee benefits: 

Under Indian GAAP, provision for leave encashment is accounted based n actuarial valuation. Compensation to employees who opt for voluntary retirement scheme can be amortized over 60 months.  Under US GAAP, provision for leave encashment is accounted on actual basis. Compensation towards voluntary retirement scheme is to be charged in the year in which the employees accept the offer.

20.          Loss on extinguishment of debt: 

Under Indian GAAP, debt extinguishment premiums are adjusted against Securities Premium Account. Under US GAAP, premiums for early extinguishment of debt are expensed as incurred.

http://accountantsadda.com/User/Inner.aspx?artid=668

Profit AND Loss, Real or Unreal , Fact or Opinion

Definition of 'Profit and Loss Statement - P&L

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".

The statement of profit and loss follows a general form as seen in this example. It begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line (literally and figuratively) is net income (profit). Many templates can be found online for free, that can be used in creating your profit and loss, or income statement.

The balance sheet, income statement and statement of cash flows are the most important financial statements produced by a company. While each is important in its own right, they are meant to be analyzed together.

What Are the Effects of Profit or Loss in a Business Organization?

The main goal for most businesses is to earn a profit. Generating profits in a business environment often indicates that an organization is offering goods or services desired by consumers at a reasonable price. Developing a strong clientele and a competitive advantage against other companies in the market may require much time and effort on management's part as it seeks to produce desirable goods or services that produce profits. Business organizations that cannot complete these functions may face the prospect of losing money from their operations and dealing with the consequences of financial loss.

Profit Allows for Growth

A positive effect of companies generating operational profits is the ability for companies to expand and grow their operations. Companies often reinvest a certain amount of profits earned from current operations into new business opportunities or expanding current operations to increase business output. These opportunities are usually taken on so companies can increase their market share in the business environment and generate further profits from expanded operations. Companies may also choose to enter foreign economic markets to take advantage of potential profit opportunities in developed or emerging economies.

Profit Improves Employee Livelihood

Business profits often allow companies to improve the livelihood of their owners, managers and employees. This may include increasing compensation levels and offering performance bonuses or additional vacation time. These rewards may also generate positive goodwill with employees. Employees may be willing to work harder and increase their efficiency to achieve more profit for the company. This symbiotic relationship allows the business to generate more profits from business operations and pay a fraction of these profits to employees based on their performance.

Loss Reduces Operations

Losses resulting from business operations have the opposite effect of profits. Companies facing a reduced market share from lower consumer demand or a downturn in the business cycle may be forced to reduce operational output. This reduction may include laying off employees, selling equipment or assets and closing underperforming business facilities. Companies may need to take additional measures depending on the consistency of business losses and whether their initial reduction methods have lessened the impact of operational losses.

Loss Leads to Bankruptcy

Consistent business losses may force the company into bankruptcy. While many businesses try to avoid bankruptcy by selling the business to a competitor or securing additional financing to continue operations, bankruptcy may be the final option. Underperforming small businesses may require the business owner to declare personal bankruptcy, depending on how the company is organized. Business bankruptcy may be a long and arduous process, depending on the size of the company and other aspects relating to business operations. Declaring bankruptcy may also create an economic ripple affecting other companies in the business environment.

26 SEP, 2012, 06.10AM IST, ET BUREAU 

Profit and loss can be manipulated, market price gives a better picture of cos' financial position

Collected from Economic times BY 

Swaminathan S A Aiyar

(Valuations are different from profits and losses. Profits and losses tell you about the past. But valuations are estimates of the future, and those are necessarily different from past performance.)

The Comptroller and Auditor General's ( CAG) estimates of government losses and corporate gains have stirred much controversy. Supreme Court Chief Justice S H Kapadia attempted to elucidate valuation principles in a recent speech. He reportedly said, "Today, a number of controversies on valuation are discussed but the basic principle of valuation is that loss is a matter of fact and profit or gain is a matter of opinion. Please apply this test to the controversies going on. I do not want to discuss anything further. Loss is a matter of fact and profit and gain is a matter of opinion. So, if you understand these principles, we will be able to judge." 

I cannot make sense of this. I know of no principle in economics or audit that says losses are real but profits are not. One principle actually enunciated widely is "cash is a fact, but profit and loss are opinions". That's very different from the Chief Justice's claim. 

In 1975, the Press Club asked me to explain a puzzle. Its accounts showed a profit, but it had no money in the bank. Where had the profit gone? I soon found the answer. The accounts showed all receivables as 'income'. But many members had not paid their bills, so the receivables had not been received! There was a paper profit, but a cash deficit. This was no error: audit rules specifically permitted this. This accounting practice was widely used by the biggest corporations. Some showed huge profits, but showed even bigger sums owed to the company by 'sundry debtors'. Such companies had a big paper profit, and even paid taxes on this profit, yet had a cash deficit. 

Beyond a point, treating receivables as profits becomes sheer pretence: the sums should be written off as unpayable. Some companies do writeoffs honestly, but others resort to 'ever-greening' dud loans, quite legally. Given such accounting flexibility, loss and profit are clearly matters of opinion, and can be manipulated to suit the company's strategy. Again, a company's balance sheet may not show all assets and liabilities: some can legally be kept off balance sheet. This enables companies to hide enormous liabilities off the books, showing a very healthy but misleading picture on their books. A classic example of this was Enron, which looked highly profitable, but accumulated such huge debts offbalance sheet that these ultimately sank the company. Citibank's off-balance sheet activities helped sink it in the 2008 collapse. 

Profit is not a clean, unclut-tered concept. Operational profit is income minus expenses. But after that you have to deduct interest on loans, amortisation of old loans, depreciation and taxes. Here again, much flexibility is legally permissible, allowing a company to show profits or losses as it chooses. Contrary to Kapadia's claim, all losses are not a fact. Back in the 1980s and 1990s, India had many large companies (notably Reliance) that paid no corporate tax.

Why not? Because the government had provided several tax breaks. The old 'investment allowance' allowed companies to deduct a certain percentage of new investment from gross income. Investing in backward areas or highpriority industries was sometimes tax deductible. 'Accelerated depreciation' allowed companies to deduct up to 100% of the value of new equipment in the first year or use, even though the equipment might last decades. 'Weighted deductions' were given for items like R&D — that is, if a company spent Rs 100 on R&D, the tax law permitted the company to treat this as Rs 150 for tax purposes. 

In the 1990s, many companies took advantage of thesetax incentives, entirely legally, and reduced their tax liability to zero. The balance sheets they presented to the taxman showed a loss after all deductions, so no tax was payable. Yet, the law allowed the same companies to present a totally different balance sheet to investors, showing bumper profits. That's how zero-tax companies like Reliance enjoyed soaring stock market prices. This charade was finally checked by introducing a minimum alternative tax, ensuring that tax breaks could not be used to escape tax altogether. 

Valuations are different from profits and losses. Profits and losses tell you about the past. But valuations are estimates of the future, and those are necessarily different from past performance. Facebook makes little profit, yet is seen as having such a huge future that it commands an astronomical price. By contrast, some profit-making companies sell at a discount because of poor future prospects. 

A company with good corporate governance (like Nestle) will have a high market price relative to earnings. But a company with a poor image ( KingfisherBSE 8.08 %) will have a much lower price, since investors don't trust its accounts. 

If a company is believed to have huge hidden bad debts — like Citibank in the US — its market price can be just half its book value. But a bank with a solid reputation — like HDFC BankBSE 0.34 % — is quoted at five times book value. In sum, all valuations are opinions. The only reality is the actual market price, which fluctuates as valuations of buyers and sellers keep shifting. Whatever Justice Kapadia believes, losses are not a more solid ground for valuation than profits. Losses can be manipulated in balance sheets no less than profits. Cash profits and losses are more real, but even they are uncertain guides to the future. The CAG's valuations cannot but be matters of opinion.

http://economictimes.indiatimes.com/opinion/columnists/swaminathan-s-a-aiyar/profit-and-loss-can-be-manipulated-market-price-gives-a-better-picture-of-cos-financial-position/articleshow/16551582.cms

Loss is a matter of fact and profit, of opinion: CJI   Collected from Hindu Business Line

Chief Justice of India S.H. Kapadia on Saturday rejected the notion that the rule of law was an impediment to economic growth, terming it instead the “single largest” stimulant factor.

Further, a “minimum standard of fairness” was being ensured only through the rule of law, he said at an international conference here.

In an apparent reference to the Comptroller and Auditor-General’s report on loss in coal blocks allocation, Justice Kapadia said: “The basic fact is that loss is a matter of fact, whereas profit or gain is a matter of opinion.” In the absence of economic literacy, coupled with legal literacy, “government institutions will suffer… in terms of democracy, and the economy will be in peril.”

The Constitution, he said, had mandated that the government to “… strive for economic democracy,” and without it “political democracy will be at peril.”

Quoting economic data, the Chief Justice said that even an eight per cent GDP growth would generate only 12 million jobs a year, while the country needed 10 million new jobs every year, given that 30 per cent of the population would be looking for employment in the coming years. If the growth slipped to 5.5 per cent for some reasons, a mere 8.25 million jobs would be created a year. Promoting investment, therefore, was crucial to stimulate growth.

Benchmark

He suggested that India align its tax, corporate and commercial laws with the models suggested by the United Nations and the Organisation for Economic Cooperation and Development. “Our benchmark becomes what is stated in the electronic media and the print media. We don’t go into deep studies.”

http://www.thehindu.com/news/national/loss-is-a-matter-of-fact-and-profit-of-opinion-cji/article3927083.ece

Factual losses and profitable opinions

N Sundaresha Subramanian/New Delhi 25 Sep 12 | 12:35 AM

--------------As he (Chief Justice of India  Mr. Kapadia ) entered the final week, Kapadia also made a significant contribution to discussions on the allocation of natural resources. Kapadia reportedly said, “Sometimes, we see certain (TV) programmes and we build our perceptions. How many of us know the basic principle of valuation? Today, a number of controversies on valuation are discussed, but the basic principle of valuation is loss is a matter of fact and profit is a matter of opinion."

Some people are even trying to sell this remark as an endorsement of the government’s ‘Mother Earth’ argument. In my opinion, the CJI’s limited point, as is clear from the above quote, was that people should understand these concepts before building castles on numbers.

According to the principle of conservatism, a prudent accountant has to provide for all losses, both present and future, as and when he comes to know about these, whereas profits are booked only when they are actually realised. The motive is to present a “true and fair" picture of the financial position of the enterprise. While all going concerns should ideally follow this principle, tax authorities are not very comfortable with its blanket application as indefinite postponement of profits may hit the revenue.

Interestingly, the much quoted, misquoted and abused “Report no 7 of 2012-13", more famously known as the Coalgate report, does not use the words “profit or loss". The report said, “The financial impact of the benefit to the private allottees has been estimated to the tune of Rs 1,85,591.34 crore as on March 31, 2011, for open cast mines/open cast reserves of mixed mines."

Now, what is “financial impact of benefit" to private allottees? In the hands of private companies, these are profits, therefore, it is just a matter of opinion. They can book it today, they can book it on the day they dig the coal or the day they sell it or they may use a mechanism to distribute it over years. The report added, “The government could have tapped a part of this financial benefit by expediting decision on competitive bidding for allocation of coal blocks."

In this sentence, lies the devil — the part of this financial benefit, which the government could have tapped. Is this not a fact? If this is a fact, then is it not a loss? What is your opinion?

http://smartinvestor.in/market/Features-134965-Featuresdet-Factual_losses_and_profitable_opinions.htm

Why is CJI taking on CAG with a flawed ‘loss’ theory

by R Jagannathan Sep 24, 2012

The outgoing Chief Justice of India (CJI), Sarosh H Kapadia, has given the UPA government much grief, thanks to his Vodafone judgment, but on Saturday he could not but have warmed their cockles with his indirect observations on the 2G scam and judicial activism.

Kapil “zero-loss” Sibal and Palanippan “zero-loss” Chidambaram will feel vindicated.

Though he did not actually criticise the estimates of the Comptroller and Auditor General (CAG) – who had put the presumptive loss on 2G spectrum at Rs 1,76,000 crore and the unintended “gains” in the coal block allocations at Rs 1,86,000 crore – there is no doubt he gave the CAG’s critics, which include the PM, ammunition for the same.

According to a report in The Indian Express, the CJI said: “Loss is a matter of fact and profit and gain is a matter of opinion.”  So, by implication, the CAG is talking through his hat.

Has the outgoing CJI’s words aided the cause of Manmohan Singh? Image courtesy PIB.

The CJI expanded on his basic statement thus: “Today a number of controversies on valuation are discussed, but the basic principle of valuation is that loss is a matter of fact and profit or gain is a matter of opinion. Please apply this test to the controversies going on. I do not want to discuss anything further. Loss is a matter of fact and profit and gain is a matter of opinion. So if you understand these principles, we will be able to judge. Our perceptions will become more sound and we know where the shoe pinches.”

Correction, Chief Justice Kapadia. If you are merely saying that the loss figures on 2G and coal blocks depend on the assumptions made by the CAG and are thus mere guesstimates, we are with you. But to claim that “loss is a matter of fact” is also quite wrong.

In accounting principles, loss is a matter of recognition, and not just fact. Unless you are in a business where revenues and costs are accounted for only on a cash basis, loss too is often a matter of opinion.

As any qualified CA can tell you, companies can turn losses into profits, and profits into losses, depending on what revenues or costs they choose to recognise. You can turn a loss into a profit by changing the depreciation method from written down value (WDV) method to straightline, or by valuing inventories and sales differently. A construction company can recognise revenues one quarter earlier or one quarter later, depending on how much of a project is complete, rather than when sales actually materialise. This impacts the loss figure, if any.

In the case of banks, a bad loan can be made good by rescheduling a loan and thus a loss can be turned into a profit. Conversely, by providing for a potential loss in advance, a profit can be turned into a loss – if a bank or company wants to do so. Many small-time promoters, in fact, do this to influence market prices and indulge in insider trading. Smart banks like HDFC, for example, also tweak their income, cost and bad loan recognition norms to smoothen out results from quarter to quarter.

In short, loss is as much a matter of opinion as profit or gain. The CJI could consider this fact to modify his views.

But since the purpose of his observations must have been to contradict the CAG on his 2G and coal block loss figures, let us also deal with them again.

Firstpost would readily agree that the CAG’s sensational loss figures may have grabbed media attention like never before and focused attention on the “losses” per se rather than the real problem: lack of transparency in decision-making and possible attempts to help out crony capitalists.

However, can the CJI really claim that selling 2G spectrum at prices lower than what the market can bear is not a loss to the exchequer? It’s not about the quantum of the loss, but that there was a loss is certain. Similarly, how can one say that there was no loss in handing over coal mines for free to 142 businessmen without a transparent policy?

The CJI is surely right in emphasising that the courts (and the CAG) should not transgress into the policy-making area, but surely it is the CAG’s duty to point out what the costs of a policy were?

Does it make sense for a government – any government – to decide to sell spectrum or allot coal blocks without quantifying the losses and gains?

It is possible to justify free coal block allotments of Rs 1,86,000 crore (as the CAG claims) if the government can equally quantify social or other benefits of a similar amount. It is all right to sell spectrum at 2001 prices, or even give it away free, if there are larger social benefits to be had (teledensity), but governments that want to do this must find a way to quantify the losses and gains, however, presumptive they may seem.

In the absence of this kind of costs-and-benefits calculations, on what legitimate basis can any government decide to go for an auction or a first-come-first-served scheme when it does not know why it is doing so?

CJI Kapadia is surely right to ask everyone to take the loss or gain figures with a pinch of salt, but no government should draw comfort from this. Governments have no right to take policy decisions without trying to at least estimate who will gain or lose. The figures may be wrong or wildly out of whack in hindsight, but they will at least have the legitimacy of a well-thought-out line of reasoning.

The2G and coal block allocations are scams precisely because the government did not do the calculations that the CAG did post facto. The CJI would have done well to emphasise this aspect, rather than just suggest that the loss figures are not fact.

Half-truths are of no use to anybody.

http://www.firstpost.com/india/why-is-cji-taking-on-cag-with-a-flawed-loss-theory-465903.html?utm_source=frontpagepicks&utm_source=article_mumbai

D Subbarao’s point: More revenue and welfare accrue from cheap 2G spectrum than from auctions

ET Bureau Sep 20, 2012, 05.20AM IST

The present RBI governor, Duvvuri Subbarao, was finance secretary when 2G spectrum was allotted to new entrants at 2001 prices in 2008. Deposing before a parliamentary panel on Tuesday, he said that any so-called loss to the exchequer was dependent on assumptions and the numbers anyway were notional. He is correct.

The decision to allot spectrum at Rs 1,650 crore per player, instead of auctioning it for potentially higher rates, increased competition, brought down prices and made the mobile phone a ubiquitous instrument of communication for Indians across income groups. Indeed, our telecom revolution was based on allotting spectrum at reasonable rates. What the government then gave up in terms of revenue maximisation from telecom, was more than made up by the social and economic gains made possible by the communications revolution.

The faster economic growth and superior, networked tax collection efficiency yielded higher tax collections as well, more than offsetting any direct revenue forgone in telecom. This is similar to the experience of Japan and South Korea, which have the world's highest penetration of the latest wireless communications, made possible by the allotment of spectrum by beauty parades, rather than through auctions.

India tried spectrum auctions on two occasions. Both have flopped. In the mid-1990s, the government auctioned telecom licences and companies bid the moon to acquire these. Services were priced as high as Rs 16 per minute, with charges for incoming calls as well. Consumers would not bite, most companies soon failed to pay up, and the government had to scrap the auctions and came to a revenue-sharing regime.

The second instance is more recent, when 3G and 4G spectrum was auctioned in 2010. The government netted Rs 1,06,000 crore, but services are costly, poorly distributed and generally considered a failure. The debt that telecom companies now carry to pay the government upfront for spectrum makes it tough to expand their normal businesses. The lesson should not be lost in the upcoming 2G auctions.

http://articles.economictimes.indiatimes.com/2012-09-20/news/33976900_1_upcoming-2g-auctions-spectrum-auctions-duvvuri-subbarao

CAG  VINOD  RAI Says : Imputing Motives to CAG Reports to Hit Accountability 
Imputing motives to audit reports of CAG would hinder accountability and good governance,CAG Vinod Rai has said.Ascribing political motive to the institution and its officers would only be detrimental to its task of promoting accountability and good governance, he said CPI mouthpiece Janayugam in an interview.

Several times our findings and judgment have been questioned it happened in the Bofors case in the 1980s,in the audit of disinvestment in 1990s,in the coffin case in 2002,and in the spectrum case recently.Every time we were proven right.All these years,we have maintained our objectivity,impartiality and professional competence, he claimed in the interview.He favoured open competition in both government procurement and allocation of resources to achieve value in these transactions.

Existing rules and regulations and processes do not adequately provide requisite transparency.Fair and open competition is the best and most transparent way of achieving value for money in large procurements and also in cases of allocation or lease of public assets or natural resources, he added.

In the 150 year history of the CAG,he says,it has upheld standards and is looked up to for its international levels of competence.CAG has a critical role to play in ensuring transparency and good governance in the country, he said.

The.1,86,000 crore losses to the exchequer because of allocation of coal blocks to private firms and power companies was a most conservative estimate, Rai reiterated.Rai said that the figures in the report were logical and irrefutable.The computations have been made on the basis of sound and reasonable assumptions.We have taken the most conservative alternative in arriving at the financial impact of allocation of coal blocks through the present system. He said he was confident of upholding the credibility of the audit report.
http://mobilepaper.timesofindia.com/mobile.aspx?article=yes&pageid=2&sectid=edid=&edlabel=ETD&mydateHid=25-09-2012&pubname=Economic+Times+-+Delhi&edname=&articleid=Ar00206&publabel=ET

No loss to Govt from 2G spectrum allocation: Sibal

http://www.thehindubusinessline.com/industry-and-economy/info-tech/article1065479.ece

Chidambaram clarifies on ‘zero loss’ in coal block allocations

http://www.thehindu.com/opinion/op-ed/article3832610.ece

Coalgate: Sibal gives another 'zero loss' theory after 2G

http://www.newsbullet.in/india/34-more/34313-coalgate-sibal-gives-another-zero-loss-theory-after-2g

Coal licence cancellation will cause huge loss: Sibal

http://www.thehindu.com/news/national/article3836047.ece

Fiscal Deficit Manipulation

Kelkar panel questions FY13 Budget maths

Says figures awry, fiscal deficit may cross 6% if reforms not undertaken

Indivjal Dhasmana / New Delhi Sep 26, 2012, 00:30 IST   The Vijay Kelkar panel on fiscal consolidation has questioned the Budget numbers on subsidies and tax receipts for 2012-13, because of which it expects the fiscal deficit to cross six per cent of GDP this financial year if the reforms suggested by it are not undertaken. The panel wants the finance ministry to meet the disinvestment target of Rs 30,000 crore, as it has got feedback that only Rs 10,000 crore can be mopped up, according to those in know of the development.  he first step on fiscal consolidation is to correct the figures given in the Budget and then recommend measures to rein in the deficit close to the estimates, they add. KELKAR’S TAKE Rs 7.71 lakh crore: Budget estimate of tax receipts Rs 70,000 crore: Amount that Kelkar panel finds tax receipts overestimated by  Rs 1.90 lakh crore: Budget estimate of subsidies  Rs 70,000 crore: Amount by which subsidies were underestimated, says panel  5.1% of GDP: Budget expectation of fiscal deficit  6% of GDP: Panel’s estimate of fiscal deficit if reforms are not undertaken 5.76% of GDP: Fiscal deficit in 2011-12, against Budget estimate of 4.6% and revised estimate of 5.9% The panel says the Budget has underestimated subsidies by Rs 70,000 crore and overestimated tax receipts by Rs 60,000 crore, they say. According to that, the Budget underestimated the fiscal deficit by Rs 1,30,000 crore. Adding this figure to the Rs 5,13,590 crore of fiscal deficit given in the Budget, the gap between the Centre’s expenditure and receipts would turn out to be Rs 6,43,590 crore. Given the GDP figures in the Budget at Rs 1,01,59,884 crore for 2012-13, the fiscal deficit would turn out to be over six per cent of GDP against the estimated 5.1 per cent. However, the figure would be that much if no reforms happen, the committee is said to have stated. In the first four months of 2012-13, the fiscal deficit has already crossed 50 per cent of the Budget estimate. But if the government undertakes reforms on the oil and urea price fronts and the disinvestment targets are met, the deficit could be curtailed significantly, the panel is learnt to have observed. While the government has raised diesel prices by Rs 5 a litre, it is yet to undertake full decontrol of prices. Also, petrol prices remain decontrolled only on paper. Urea has not been brought under nutrient-based subsidy, and it is the government that fixes prices and subsidies for the fertiliser. Besides, the panel recommended improving the tax administration to shore up the tax-GDP ratio. The Centre’s tax-GDP ratio has remained below eight per cent since 2008-09 as against 8.81 per cent in the pre-crisis period of 2007-08. The panel gave its report to Finance Minister P Chidambaram earlier this month, but it has not been made public so far. Those in know do not say by how much the fiscal deficit would ultimately be pruned this fiscal, saying it depends on the reforms carried out by the government. They concede oil reforms are not easy. While the government has targeted to mobilise Rs 30,000 crore from disinvestment, the feedback the committee got from the ministry was that no more than Rs 10,000 crore could be mobilised thus. As such, the committee recommended meeting at least the target to prune the fiscal deficit. http://www.business-standard.com/india/news/kelkar-panel-questions-fy13-budget-maths/487645/ FinMin optimistic on fiscal deficit Despite rising subsidy bill, says fuel price action and other steps in contemplation would keep it at 5.3% of GDP, not more Indivjal Dhasmana / New Delhi Sep 20, 2012, 00:46 ISTRecent government decisions to rationalise fuel prices have given the finance ministry confidence on reining in the fiscal deficit at 5.3 per cent of gross domestic product (GDP) for 2012-13, against the 5.1 per cent pegged in the Budget. Independent economists, however, do not agree, and peg it at 5.7 per cent of GDP.  The Vijay Kelkar panel report on fiscal consolidation, which the ministry is expected to put in the public domain this week, could give clarity to the issue. At a full Planning Commission meeting on Saturday, Finance Minister P Chidambaram had said major subsidies would be 2.4 per cent of GDP, against the 1.9 per cent projected in the Budget. At 1.9 per cent, it was estimated to decline from Rs 216,297 crore in the revised estimates of 2010-11 to Rs 1,90,015 crore in the Budget estimates for 2012-13. However, if subsidies rise to 2.4 per cent of GDP, the number would be Rs 243,837 crore. The net effect will be that the fiscal deficit rises to Rs 5.6 lakh crore against the estimated Rs 5.1 lakh crore, assuming the revenue side of the Budget behaves the way detailed in the document. At this level, the fiscal deficit turns out to be close to 5.5 per cent of estimated GDP (Rs 101 lakh crore). However, the ministry is confident of curtailing this to 5.3 per cent of GDP, as the disinvestment target could be raised, some more could come from dividends by public sector entities, while non-plan expenditure will be curtailed. Officials said oil subsidies will be more than projected and the additional amount will be provided in the second supplementary budget. Despite the latest fuel price moves, oil marketing companies (OMCs) are complaining of Rs 1.67 lakh crore of under-recoveries. About 40 per cent of it could come from upstream oil companies, which will leave the government with a subsidy burden of Rs 1 lakh crore. This will be in addition to the Rs 43,580 crore already listed for the OMCs for this year but used for meeting the under-recoveries of 2011-12. Officials said the second supplementary budget might only be for essential items such as the fuel subsidy. They said the fertiliser subsidy would be close to the projected amount of Rs 60,974 crore against the Rs 67,198 crore in the revised estimates of 2011-12l. They also expect the revenue target to be close to the amount in the Budget on the tax front and some additional inflow of funds from non-debt capital receipts, such as disinvestment (where the budget estimate was Rs 30,000 crore. The ministry has already told all departments to cut non-plan expenditure by 10 per cent. Some savings could come from this, too, officials say. Besides, public sector units have been asked to invest their surplus cash or give higher dividends to the government. The budget pegged the latter figure at Rs 50,000 crore, almost the same as the revised estimates of 2011-12. With all these, officials said, the deficit could be kept at 5.3 per cent of GDP. Economists don’t agree. One of them said only Rs 15,000 crore could come from the disinvestment cleared by the cabinet. The cabinet has cleared nine companies for this, of which the auction process could be started in National Aluminium, NMDC, Minerals and Metals Trading Corporation and Oil India. In the first four months of 2012-13, the government has already run up a little over half of the estimated fiscal deficit for the entire year. In the first quarter, it was 8.1 per cent of quarterly GDP. Devendra Bhatt, director with India Ratings (part of the Fitch group), says the deficit will end at 5.7 per cent of GDP, roughly the same as last year. http://www.business-standard.com/india/news/finmin-optimisticfiscal-deficit/487040/ Cut the CAD to size Mythili Bhusnurmath  Monday October 01, 2012, 06:44 AM "The government is set to take more decisions to accelerate capital markets reforms and attract overseas capital," said a report in this paper last week ( Reforms Juggernaut to Come Rolling into Mkt, ET, September 24, 2012).  It then went on to listthe measures being contemplated by the UPA-II government in its reformist avatar: raising the ceiling on foreign borrowings, easing curbs on portfolio investors and liberalising norms for overseas borrowings.  The reliance on debt flows and fickle portfolio investors might seem at odds with one of the key lessons from the unfolding crises in key member states of the European Union. But the finance ministry, the report adds, is of the view that external commercial borrowings (ECBs) are a source of "long-term, cheap and stable funds".  Unfortunately, the finance ministry is off the mark on all three counts. ECBs are not always long-term. Nor are they always cheap or stable. On paper, ECBs may look cheaper than rupee loans. The flood of liquidity unleashed on the world by the powerful trio - the US Federal Reserve, the European Central Bank and the Bank of Japan - may even translate into cheap and abundant supply of funds.  For now! But a simple comparison of interest rates is misleading. Once the exchange risk or hedging cost is factored in, ECBs are no cheaper, and are often more expensive than rupee loans. A sharp depreciation in the rupee can cost borrowers dear.  Ask corporates that issued foreign currency convertible bonds when the rupee was quoting in the low 40s to the dollar and have to redeem their debt now when the exchange rate is over 50 to the dollar.  There is another problem. The revenue stream for many companies opting for ECBs is in rupees. So, there is no automatic hedge against currency fluctuations. Also, depending on the timing and the quantum of repayment, the resultant demand for dollars can rock the forex market.  Unfortunately, in any discussion of the twin deficits that beset the country today - the fiscal and the current account deficit - the latter barely gets a look in. The fiscal deficit hogs all the headlines though the current account deficit has the potential to cause far more damage. Consider: in a worst-case scenario, the fiscal deficit can be inflated away. But the current account deficit cannot.  Moreover, the fiscal deficit or the excess of government spending is subsumed in the current account deficit - since a large fiscal deficit usually spills over to the current account.  Despite this, the government seems more focused on finding ways to finance the current account deficit than on looking for ways to rein it in. However, any meaningful solution must look at both. Today, we need to find more forex sources to finance our stubborn and dangerously-high current account deficit of about 3.5%. But the search should not increase our dependence on more questionable means of financing. It must also focus on reducing the deficit.  Sadly, we have not seen much action on that front as yet. Exports have slowed down considerably but demand for exports is a function of both price and global economic well-being. So, there is not much we can do to increase exports.  Imports, on the other hand, are more amenable to control. The two main items in our import basket are oil and gold. But demand for oil is largely inelastic since the government is reluctant to let consumers feel the pain of rising global prices. So, the oil import bill will not shrink unless global prices fall or government follows through on the steps taken last month and allows a full pass-through of higher oil prices. This is unlikely.  We could make gold imports less attractive by restoring the public's faith in financial instruments. But that is not going to happen easily or quickly; not when real interest rates are again negative. SBI, for instance, offers an interest rate of 8.5% on deposits over three years even though consumer price inflation has crossed 10%. A negative real return of 1.5% is hardly going to encourage savers to move from gold to bank deposits.  In the short run, allowing corporates to access more overseas debt might increase foreign inflows. But the long-term implications of encouraging debt rather than non-debt inflows could cost us dear.  The RBI annual report puts it well, "To minimise the possibility of external shocks further disrupting India's growth sustainability over the next few years, it is important to not only focus on financing of current account deficit but also on compressing the deficit to lower, more manageable levels.  Otherwise, there are risks to current account deficit from both domestic and external events. In the recent period, current account deficit has been managed by improving debt inflows. However, this has long-term costs for debt sustainability and increases refinancing risks over time."  Despite this homily, the government seems to be toying with quick-fixes, eschewing the more sustainable remedy of reducing the current account deficit by allowing complete pass-through of oil prices and reducing the fiscal deficit. Ironically, the increased reliance on debt comes ata time when many of our external sector parameters have worsened (see accompanying graphic).  It is worth reflecting that we have fewer reserves today when we are a $2-trillion economy than when we were a $1-trillion economy!  Will the finance ministry heed the central bank? In the past, it has paid scant heed. But the newly-appointed chief economic adviser Raghuram Rajan has also flagged the issue. So, perhaps, this time, it will be different.  http://blogs.economictimes.indiatimes.com/myth-n-reality/entry/cut-the-cad-to-size 1 OCT, 2012, 06.19AM IST, SHAJI VIKARAMAN,ET BUREAU  India needs more growth, more public investment:  Vijay Kelkar Mr. Vijay kelkar former finance secretary and advisor to the finance minister almost a decade ago, has often been one of the first port of calls for India's fiscal managers over the last few years when it comes to working out a blueprint for fiscal consolidation.  Kelkar, who headed the 13th Finance Commission, was told to present a fiscal road map for the medium term by P Chidambaram days after he returned to North Block.  A day after the report of the committee headed by him was made public, in an interview to Shaji Vikraman, he spoke about the approach of the committee and the dangers of not addressing macro economic imbalances. Edited excerpts:  The committee headed by you says that the economy is poised on the edge of a fiscal precipice and draws comparison to the situation reminiscent of 1991. The government's chief economic advisor, Raghuram Rajan, says that we are far from that. Aren't you being alarmist?  What we have said that if the present trend continues, the macro economic problems will get translated into a high fiscal deficit. Last year, we had a fiscal deficit of 5.8 % of GDP and a current account deficit of 4.2 %. If this trend continues, the current account deficit could go up to 4.3 %.In our report, we have said that going by the trends this year, the fiscal deficit is likely to be 6.1 % of GDP which is far higher than the budgeted 5.1 %. As the Prime Minister said recently, money does not grow on trees. Remember, the Indian rupee is not a reserve currency. So the options are either we boost exports, draw down our reserves or borrow from the world. At a current account deficit of 4.3 %, we would need $ 80 billion alone. Then there is maturing short term debt which needs further re-rolling. This will further increase the financing requirement. Such a trend would be unsustainable. At this kind of financing and compared to 1991, the Indian economy is much more dependent on the global economy which itself is in turmoil. Energy prices are also three times higher in real terms compared to 1991 and our energy dependence is much higher now. That's why there is a greater sense of urgency now especially when you don't have the headroom to counter cyclical policy measures and when you need to generate jobs for millions of young which requires high growth. The Gangotri of growth deceleration and macro economic problems is the continued high fiscal deficit which also leads to high inflation. So we need to take corrective action swiftly. Your report has projected a fiscal deficit of 6.1 % of GDP in FY13 in a no-reform scenario. The government has already indicated that it may not meet the target of 5.1 %. Your comments.  If there is no credible action being taken, we have said that fiscal deficit could be 6.1 % in 2012-13 due to a likely shortfall in gross tax revenues of close to 60,000 crore and higher subsidies of about 70,000 crore compared to the budget figures. The gross borrowing requirement is also likely be higher in such a scenario. Our assessment is that if you take corrective measures now, there is tremendous scope for pruning the deficit You can attack inequitable subsidies, focus on greater tax compliance- an area where there is clearly scope to expand the tax base. The core of our argument is that India needs more growth, more public investment. Once we have higher growth, there will be a virtuous cycle- deficits will come down, interest rates too and there will be higher private investment which will boost growth and employment. The engine of growth has to be greater momentum in public private investment which will boost growth. Shouldn't we raise public investment to build infrastructure considering the problems with the PPP model?  It is still possible to boost public investment. The railways have been under investing. But we have also been lagging in power, roads and a number of areas such as airports, seaports and universities and urban infrastructure. We need to speed up investment...It's important to remove obstacles in terms of regulatory and business climate to encourage investment. All this can be done through proper regulatory architecture and improved governance. We have not said anything that has not been said or done in the last 20 years. We can certainly do these supply side reforms which will boost growth. The government has indicated that it would be difficult to be guided by your recommendations on cutting subsidies...  Our report shows that there could be a financial crisis for state-owned oil marketing companies if the current trend of under-recoveries continues. There could be a knock on impact on banks too. But why rule out what could be better than expected in terms of policy action or corrective steps. For instance, there can be better innovations which the government may introduce than what we have outlined which could lead to better outcomes. India has done more than one fiscal correction in the last 20 years. Nothing is beyond us. Through innovative approaches to divestment and the new instrument of monetising unutilised land with public sector undertakings as we have suggested, we can raise rapidly resources which can be used to finance infrastructure. The unutilised land according to one study can yield 33,000 crore in one city alone. This indicates there are enormous possibilities. The recent Supreme Court judgement provides clarity and direction for taking steps in handling natural resources including land. All we need to ensure is that the process is fair and transparent. That is the test. There has been criticism relating to the fiscal burden which could be imposed with the implementation of the Food Security Bill. How do you address this?  The government has multiple objectives such as promoting growth, social equity and macro economic stability. Given the state of the economy, there could be tensions in the pursuit of these objectives. Therefore, while implementing this legislation, the state of fiscal imbalance should be taken into account. That is what we have said. The committee says that the MNREGA scheme should not be fiscally constrained. Should we attempt to integrate this and other social security schemes, including cash transfers?  The MNREGA scheme is one of the most important social safety nets. We should protect them. Our report says that it is possible to see a demand-led rise in spending under this scheme. Over time we can try and integrate social security measures like food and other things with cash transfers. You have virtually said that the Direct Tax Code (DTC) should be junked  I am not saying junk it. What we have said is that the present DTC should be reviewed. Implementation of the DTC in its present form, will lead to revenue loss which we cannot afford at this current juncture. But in its present form we need to review it. You have said in the past too that the GST can be a game changer. Can we afford to hasten such a significant reform without getting the design right?  A well-designed GST is a pre-condition. It is possible to move quicker on it especially since the finance minister, the chairman of Parliament's standing committee on finance and the Chairman of the empowered committee of state finance ministers are all reformers and want to support reforms. So, one should not rule out the possibility that it may happen sooner than later. The tax to GDP ratio has become a worry for fiscal managers. What would you suggest to broaden and raise this base?  A well designed GST will be a major instrument towards increasing the tax base at the Centre and states. Getting the railways into the service tax net will also add to this. How pragmatic are some of your recommendations?  The possibilities are interesting. The innovative approaches such as exchange-traded fund will help reduce risks for retail investors while helping diversify their portfolio as also the call option model and the offer sale model will help protect the government's interest and boost the capital market. http://economictimes.indiatimes.com/opinion/interviews/india-needs-more-growth-more-public-investment-vijay-kelkar/articleshow/16618517.cms?curpg=4 Current account deficit a major cause for rupee fall: Gokarn CHENNAI, JULY 4:  India’s current account deficit has been a major factor for the downward movement of the rupee. As the current account deficit corrects, be it due to lower oil prices, increased exports or lower imports, it will have the reverse effect, said Dr Subir Gokarn, Deputy Governor, Reserve Bank of India. Replying to a question on how the rupee managed to gain in the last few days, Dr Gokarn said there is clearly some positive news from the global front, especially after the EU summit and on the domestic front in terms of policy action, particularly the raising of the ceiling on FII investments. These, he said, might have contributed to the rupee strengthening. Saying that one cannot directly correlate the rupee movement with the open market operations, he said OMOs are driven by judgments on liquidity conditions. Speaking to a group of media persons on the sidelines of a conference here, Mr Gokarn said the Reserve Bank is continuously focussing on maintaining liquidity within the comfort zone. “Whatever is causing liquidity stress, whether it is the foreign exchange market or something else, we are focused on maintaining liquidity conditions within the comfort zone that we have stated. And that will continue to be the benchmark.” http://www.thehindubusinessline.com/industry-and-economy/banking/article3602866.ece