Steep gradient ahead: required, a steady hand

The railway minister has made up her mind to lean on the centre in the next few years to support her growth plans. In 2009-10, the budgetary support has been increased by Rs 5,000 crore over the interim budget figure. But its reliance on the government for funds is expected to increase, putting pressure on the government’s already strained resource position.

In the Budget, Mamata Banerjee had a choice. She could either announce a slew of schemes, projects and investments to mark her second coming. Or, she could pay heed to lower income growth and prioritise investments and expenditure, eliminating non-essential ones. She took the first choice, wanting to make a big bang, especially in the light of state elections in her home state of West Bengal in 2011. Many of the trains, projects and announcements were not surprisingly, pertaining to her home state.

But why is this Budget a departure from the track for Indian Railways?

Railway’s income is under pressure
The economic environment has changed. Falling demand has led to a slowdown in freight; volumes nearly halved from the 9% growth seen in 2008-09. Demand for iron ore export (some of this could be due to the export cess on ore too) and container traffic has fallen. The railways responded by hiking freight rates. But that is not something the new minister wishes to do. That’s why revenue from goods and passenger traffic is projected to grow at 5% and 10.8% respectively, down from 15% and 14% in the previous year.

But expenditure is moving up
The Railway’s expenses and capital requirements have increased. In just three years, the plan expenditure has jumped by 40% to Rs 40,700 crore in 2009-10. Revised pay is a big component of the rising expenses, with Rs 12,700 crore being the permanent increase in pay, apart from arrears. The second lot of arrears of Rs 6,600 crore will be paid out in 2009-10. That means the railways has to earn more to support this higher level of expenditure, which it is not doing. Its ordinary working expenses are projected to increase by 14% compared to a much lower increase in income.

Thus, internal resources deployed will fall in 2009-10, to Rs 15,675 crore from Rs 18,738 crore in the previous year. The railways will be borrowing Rs 9,170 crore to make up the shortfall.

Funds position has become weak
The railways has been building an investible surplus used to fund its projects. That corpus has been dwindling steadily, from Rs 19,972 crore in 2007-08 to an estimated Rs 8,631 crore in 2009-10. The Budget document states that until demand recovers and the pay commission arrears are cleared, railways growth rate will not be high enough to generate sufficient surpluses. Hence, it will required increased budgetary support.

Some accounting rejigs are being done too
The Budget document mentions that all gauge conversion, doubling and electrification works are being moved to Capital. While railway accounts are a little complicated to understand, this could only mean that what would ordinarily have reflected in revenue expenditure is now being treated as capital expenditure. Move it to the balance sheet and the profitability figures do not look as bad. What is the amount involved. Gauge conversion is Rs 1,750 crore and figures for the others are not available. This is buried in the fine print.

What can one expect?
Over the past 4-5 years, the railways have been behaving like a corporate (at times much like a greedy one, for example in the Tatkal scheme and the much-hated decision to deploy a third side berth). The best aspect has been the ability to sweat its assets; to make wagons that can carry more loads, to strengthen rails to get them to bear more load, and to increase train speeds so that they may reach their destination faster. These have, of course, been marred by doubts on whether safety has been given enough attention.

What can still save the day for the Railways is a revival in demand, depending on when and by how much the economy recovers. That will lift its revenues automatically giving it a better cushion. That can be expected towards the end of the current fiscal. Still, there is the matter of exercising prudence in expenditure and having investment programmes that are driven solely by economic logic. But if economics plays second fiddle to politics in this vital infrastructure asset, the news cannot be very good a year or two down the line.

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