Railway Budget

Off the rails

Print edition : April 01, 2016

Railway Minister Suresh Prabhu on his way to present the budget on February 25. Photo: R.V. Moorthy

By adopting a niggardly approach to capital investment, the Railway Budget missed an opportunity to provide a stimulus to the overall economy.

The politics of the annual budget exercise is structured on the premise that each year it is treated as a distinct event by the people at large. This is based on the notion that popular opinion has no historical memory that connects the dots and brings to account those presiding over the finances, especially those relating to the country’s largest enterprise, the Indian Railways. Last year, when Railway Minister Suresh Prabhu presented the Railway Budget for 2015-16, he waxed eloquent on how the Indian rail system was not just a transporter of goods and people but a critical component of the national economy. His maiden budget speech was “self-critical” in that it admitted with candour that the Railways had been neglected by successive governments.

Prabhu’s latest exercise is remarkable for two characteristics. First, it creates an illusion of a serious attempt at problem-solving. Secondly, it ignores what the Ministry did in the current year and fails to address the Railways’ relationship with the broader economy.

Soon after the 2015 budget season, Chief Economic Adviser Arvind Subramanian said that a significant step up in public investment, especially in institutions such as the Railways, was necessary to provide an impetus to the economy. He pointed out that this was particularly important because private investment was not forthcoming. Referring to the multiplier effect, Subramanian observed that one rupee spent as capital expenditure on the rail system could potentially increase “economy-wide output” by five rupees.

Before the Narendra Modi-led National Democratic Alliance (NDA) assumed office at the Centre, the Planning Commission had projected an investment of Rs.5.19 lakh crore between 2012-13 and 2016-17. According to the Twelfth Five-Year Plan, budgetary support was to be Rs.1.94 lakh crore, implying an average of Rs.40,000 crore annually. This was to be supplemented by the Railways’ internal resources to the tune of about Rs.20,000 crore a year, and through market borrowings of about Rs.24,000 crore a year. An additional Rs.1 lakh crore—Rs.20,000 crore a year —was to come from projects initiated in the public private partnership (PPP) mode. Prabhu’s budget shows that in the first three years of the Plan, actual investments amounted to only Rs.1.73 lakh crore, a shortfall of 45 per cent.

A closer scrutiny of the budget reveals that budgetary support for the Plan, which can provide a “crowding in” effect on investments, fell short by 30 per cent. Despite the constant chatter about the efficacy of PPPs, such investments were not forthcoming, leading to a shortfall of 80 per cent. Internal resource mobilisation also fell short by almost 60 per cent.

New ‘five-year’ plan

Of course, after the scrapping of the Planning Commission, and given the anathema of the ruling dispensation to planning in general, Prabhu presented a new “five-year” plan (2015-16 to 2019-20) last year for the Indian Railways. Although he projected a “plan” outlay of Rs.8.56 lakh crore, he did not state how he planned to fund his new plan. Even if the granular details were missing in his last budget, the surmise of an average annual outlay of Rs.1.71 lakh crore appeared reasonable. However, there were several loose ends in Prabhu’s last budget, including the fact that the outlay for his own plan was severely underfunded. His allocations and projections for 2015-16 amounted to just a little over Rs.1 lakh crore, a deficit of 42 per cent in the very first year of his ambitious plan.

But even more shocking is the fact, according to the Revised Estimates for 2015-16, that Prabhu only managed to allocate Rs.82,192 crore, that is, the extent of underfunding turns out to be more than 50 per cent. Last year’s estimate that the Union government’s budgetary support would amount to Rs.40,000 crore has been belied. The Revised Estimates for 2015-16 reveal a shortfall of Rs.12,000 crore. Investment from all other sources, barring those flowing in from PPPs—internal resources, market borrowings, and funding from institutional sources—have turned out to be significantly lower than what he had projected last year.

Undaunted by his experience in the current year, when actual investments have been significantly lower than what he had projected a year ago, the Minister proposes to draw investments to the tune of Rs.1.21 lakh crore in 2016-17. Budgetary support for the Railways has been projected at Rs.45,000 crore. Unmindful of his failure last year, and without even a plan to overcome them, let alone an admission of his failure, Prabhu expects extra-budgetary resources from PPPs and market borrowings, among others, to provide more than half the resources in the second year of his refurbished plan. A significant feature of Prabhu’s budget is that he banks on uncertain sources of finance and depends on the caprices of private investors for PPP projects, which are known for their opaque character. By not using the Railway Budget as a means to improve the most vital transport network in the country, Prabhu has clearly missed an opportunity. But the significance of his failure is even greater if one pays attention to the fact that the Railways has the potential for transformation, especially in a situation of deep economic stagnation.

The media have made much of the fact that Prabhu, by not increasing passenger fares and tariffs for goods, has managed an adroit balancing act. But this commendation misses several important aspects of the functioning of the Railways, which is available in the budget papers. The first aspect is that Prabhu has missed targets for earnings from both passenger and goods traffic in the current year (2015-16). Earnings from passenger traffic have fallen short of target by almost 10 per cent, despite the mid-year “rationalisation” of fares, among them the setting of more stringent norms for cancellation of tickets, the phasing out of concessions for several categories and the across-the-board increase in the quantum of Tatkal tickets that now comprise a significant portion of all tickets sold on medium- and long-distance trains. Earnings from goods traffic moved by the Railways also fell short of the expected earnings in 2015-16 by almost 8 per cent. This is not just a matter of efficiency, as claimed by critics of a public enterprise. Instead, it is the result of prolonged economic stagnation, which is adversely affecting not only the movement of goods but also passenger traffic. That is, there are serious indications that even passenger traffic is beginning to be affected by the economic slowdown. Given these factors, Prabhu’s headroom for increasing fares and tariffs was in any case limited by the compression in overall economic demand for rail services. Media commentaries seem to have allowed him to capitalise on the problem by making it a virtue.

The net tonne kilometre of all freight traffic fell from 682 billion in 2014-15 to 668 billion in 2015-16 (revised estimate) but is projected to increase by 4 per cent in 2016-17. The experience of the current year suggests that even this may be excessively optimistic. Even more telling are figures of passenger traffic: passenger traffic fell from 1,147 billion passenger km (number of passengers multiplied by distance travelled) in 2014-15 to 1,134 billion in 2015-16 (revised estimate). Chastened by his experience in 2015-16, Prabbu’s budget suggests a marginal increase—1,137 billion passenger km. But here lies the catch: although passenger traffic is to increase only by a minuscule 0.26 per cent in 2016-17, earnings from passenger traffic are targeted to increase by over 12 per cent. This clearly implies that passenger fares are due to increase during the year, notwithstanding Prabhu’s pretensions to having spared the passengers a fare hike.

The reliance on PPPs to undertake work on the expansion of the rail system is fraught with serious risks. Given the looming threat of implementation of the Bibek Debroy committee, which was entrusted with the task of a comprehensive review of the railway structure, several major projects undertaken by the Railways are in danger of being exposed to free riders (read private interests). Incidentally, one of the suggestions of the committee was the eventual scrapping of the provision of Railway Budget. R. Elangovan, working president of the Dakshin Railway Employees’ Union, affiliated to the Centre of Indian Trade Unions, pointed out that the new “dedicated” freight corridors to enable faster traffic might be forced to allow privately run freight trains in the garb of providing a “level playing field”.

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