Rail Budget: no fare hikes, poor finances and some clever accounting

It was a foregone conclusion that the railway minister Mamata Banerjee would keep fares unchanged in the current railway budget. Even if it was needed to get the railway’s finances back on track.

The railway minister is seeking to cultivate a people-friendly image, the outcome of which is a zero-fare hike policy. With elections due in her home state of West Bengal, despite the railway’s flagging financials, there was no way she would want to hike fares.

The state of the railways reflects on that of the economy as well, one may fear but that is not true. In the past too, there have been occasions when despite railway finances coming as a disappointment, the general Budget has not been disappointing.

But the railways form a key part of the transport infrastructure –roads, air and shipping being the others- which support economic growth. On this front, the railway’s record has been disappointing.

Commercial cargo carried in 2010-11 is expected to be only 924 million tonnes, compared to an estimated 944 mt, 4% over last year’s figure. Goods and passenger traffic are the main sources of revenue for the railways, with goods being the main contributor at about 2.5 times passenger revenues. That’s why the shortfall compared to estimates is a worry.

The gross traffic receipts, or the railway’s revenue, is estimated at Rs 94,840 crore, virtually unchanged, despite lower freight tonnage. This is due to better yields which could be either due to the mix of goods carried or higher realisations. Though the railways had not hiked freight, re-classification of goods had led to higher freight costs on certain high volume commodities in fiscal 2010-11.

The railways claim that they lost Rs 1,500 crore in revenues due to disruption of services and Rs 2,000 crore due to a ban on iron ore exports from Karnataka.

Working expenses rose to Rs 67,000 crore, 3% over the Budget estimate. The railways has provided Rs 5,700 crore as depreciation reserve fund, Rs 14,500 crore towards pension fund and dividend liability of Rs 4,917 crore. This is much lower than the budgeted figures of Rs 7,600 crore, Rs 14,500 crore and Rs 6,609 crore. That results in a positive difference of Rs 3,500 crore. If you remove that from the projected surplus of Rs 4,105 crore, it is a very meagre surplus. The plan outlay for 2010-11 has been slashed by about Rs 1,000 crore to Rs 40,315 crore.

The Budget estimates for 2011-12 are cheery as ever. Freight is expected to rise by about 7% to 993 mt while passenger traffic is expected to rise by 6.4%. Gross traffic receipts are expected to rise by about 12%, much higher than volume growth. Thus, the railways has not announced a freight hike, but it would endeavour to increase yields, by tinkering with freight classification or some other means, to bridge the gap. The railways has projected a surplus of Rs 5,258 crore for 2011-12.

The financial position of the railways is hampering its ability to invest, as visible from the shrinking of its capital outlay. It has proposed a capital investment of Rs 57,630 crore which is a substantial jump of 43%. This would have to be part-funded by borrowings of about Rs 21,000 crore, in a year when interest rates are ruling high. The railways will depend on higher support from the government, with a gross budgetary support of about Rs 20,000 crore in 2011-12 compared to an estimated Rs 16,000 crore in 2010-11.

To sum up: Though freight rates have not been hiked, higher value growth compared to volume growth appears to indicate either some inflation in freight costs for industry or some other means of raising income.

Inability to adequately invest in upgradation and acquisition of rolling stock remains a concern. Against a target of 18,000 wagons, only 16,500 wagons are being acquired in 2010-11, the target for 2011-12 is 18,000 wagons again. This will mean that the wagon shortage issues that industry complains about may continue in 2011-12 as well.

Stock market investors have stopped using the railway budget as a barometer of what to expect in the main Union Budget to be announced on February 28. So, the impact of the budget on the markets will be minimal. It will be reflected in the few stocks which depend on the railways for business. Again, most of these reactions are knee-jerk because the performance of these companies in 2010-11 would anyway reflect the investment programme of the railways. And, the railways is not announcing a cut in investments in next year. Either way, the rail budget day should not be a big parameter for deciding whether to or not invest in these stocks. Gauging the railway’s financial performance in the course of the year, and actual investments on ground should be the main deciding factor.

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