On the reform track

Print edition : March 25, 2005

Lalu Prasad arrives at Parliament House on February 26 to present the Railway Budget. - B. MATHUR/REUTERS

Railway Budget 2005 marks an explicit attempt to reorient the Railways in a liberal framework and possibly heralds a shift in Lalu Prasad's political outlook - from social justice to economic reforms.

LALU PRASAD'S second Rail Budget since the United Progressive Alliance (UPA) took office last year is full of surprises. The proposals, unveiled on February 27 even as he was waiting for the results of the Assembly elections in Bihar and Jharkhand, are uncharacteristic of the man. Compared with last year's Railway Budget, which was quintessentially Lalu Prasad's, the latest edition marks the first explicit attempt to reorient the Railways in a liberal framework through the device of the Railway Budget.

Although Lalu Prasad left passenger fares unchanged, a clever recalibration of the classes of freight will result in increased revenues of about Rs.650 crores. The votaries of liberalisation have applauded his decision to end the monopoly of the Container Corporation of India in the movement of container traffic, which is potentially profitable. However, critics of the move say that handing this segment of traffic to private carriers and service providers will deny the Railways a potentially profitable source of revenue. Many of the new initiatives relate to managing the difficult situation that the Railways have been in during the last decade.

One of the hallmarks of the last Budget was the set of welfare measures it promised for those who are at the margins of the Railways' 1.5-million-strong workforce. Porters, for instance, benefited from the measures he unveiled last July. It was but natural that the advocates of economic reforms were disappointed with the Budget Lalu Prasad presented last year. They were pleading that the winds of change ushered in by economic liberalisation in the 1990s also envelope the Railways. In particular, they have been demanding that the Railways be positioned predominantly as a viable commercial organisation, one that is a stand-alone profit centre, without having to depend on state patronage.

Additional revenue from freight is to come mostly from the reclassification of items such as grain and iron ore meant for exports. However, the rates for cooking gas, kerosene, naphtha and petrol have been lowered by 2-4 per cent. Traffic earnings in 2005-06 are projected to grow at about 8.9 per cent. Lalu Prasad expects that even if expenditure increases by about 7 per cent, the Railways will end the next fiscal year with a surplus of Rs.1,976 crores, 14.5 per cent higher than in the current year.

Appropriation to the depreciation reserve fund is to increase by 35 per cent, to Rs.3,604 crores, and to the pension fund by 6 per cent, to Rs.6,940 crores. However, the annual Plan outlay for 2005-06 is set to grow by 5 per cent - hardly covering the rate of inflation - to Rs.11,827 crores. Gross budgetary support to the Railways in 2005-06 is to increase by a meagre Rs.210.81 crores, implying a total of Rs.7,230.81 crores. The Railways expects the Union government to provide an additional Rs.1,723 crores to fund the "viability gap" in projects identified for the private sector and for national projects.

Since market borrowings are to be capped at the current year's level of Rs.3,400 crores, the squeeze on investment in fresh capacity is likely to be impaired seriously. Although Lalu Prasad has announced a Rs.24,000-crore integrated modernisation plan spread over five years, much of the funding for this will come from internal resources. Internally funded investment is projected to increase by 26.5 per cent to Rs.4,718 crores. That will depend on the buoyancy in earnings from traffic continuing.

The earnings from passenger traffic are projected to increase by 6 per cent in 2004-05, double of what was budgeted. In 2005-06, earnings from passenger traffic are projected to grow by 7.4 per cent, resulting in earnings increasing to Rs.15,080 crores. In 2004-05, the Railways are projected to carry 600 million tonnes of goods, 20 million tonnes more than budgeted. In 2005-06, the Railways expect to carry 635 million tonnes. Revenue from goods traffic is projected to grow by 9.9 per cent, reaching almost Rs.34,000 crores.

Lalu Prasad can take credit for lowering the operating ratio in the current year, which shows expenditure as a proportion of traffic receipts, to 91.2, against the budgeted ratio of 92.6. This ratio, a crude index of how efficiently the Railways manage their operations, is the best since 1997-98. Lalu Prasad has projected a further improvement in the ratio, lowering it to 90.8 in 2005-06 (this implies that the Railways will spend Rs.90.8 for every 100 rupees that they earn in 2005-06).

Originating tonnage is likely to increase by 7.7 per cent in 2005-06. While revenues are poised to increase by about 10 per cent, the total expenditure incurred by the Railways is set to increase by about 7.5 per cent. This implies that the net revenue is projected to increase by about 18 per cent, which by any standard is a respectable figure. The magnitude of the increase, which is higher than the growth rate of the economy, prompted Lalu Prasad to claim that the Railways have snatched back a fraction of the market share they have steadily lost to road transport. However, more sober assessments aver that the buoyant revenues need to be placed in the context of the decent economic growth in the past year, after the near-collapse in 2003-04.

Appropriations to the Depreciation Reserve Fund, which is the main source of funds for vital track renewal in the railway network, are set to go up from Rs.6,540 crores in 2004-05 to Rs.6,940 crores in 2005-06, an increase of just 6 per cent. The rate of growth of fresh investment is even lower, about 5.8 per cent. An allocation of Rs.15,349 crores has been provided for 2005-06, including the amounts passed on through the Special Railway Safety Fund and the Central Road Fund. In real terms, much of this increase is likely to be eaten away by inflation.

The under-funding of capital investment is reflected in the meagre allocations for the Railways' five production units - the Chittaranjan Locomotive Works (established in 1950), the Integral Coach Factory at Perambur in Chennai (1955), the Diesel Locomotive Works in Varanasi (1961), the Wheel & Axle Plant in Bangalore (1984) and the Rail Coach Factory at Kapurthala (1985). For more than a decade these plants have not been modernised. Instead, the Railways directed these units to outsource their work increasingly to private suppliers or manufacturers. The negligence of these production units is also reflected in the general unwillingness to invest in plant and machinery in the rail network. Observers point out that this is insufficient to overcome the structural problems that plague the Railways.

THE "new" initiatives in the Budget result from an attempt by Lalu Prasad to manoeuvre around the structural problems that have been unaddressed in the past decade. This has been primarily because of the niggardly financial support from the Union government. Given this background it is not surprising that Lalu Prasad has attempted to "manage" a difficult situation. For instance there is the attempt to "manage" the severe crisis of shortage of wagons to carry freight by reducing the turnaround time of wagons from six days to five. Another new initiative is to "involve" the private sector to overcome the problem, which has fundamentally been caused by prolonged under-investment in capacity.

The problem with this approach is that it attempts to "manage" the crisis, without facing it head-on, and therefore has its limits. Moreover, the strategy of invoking the new mantra of a public-private partnership in the face of the crisis can make matters worse. In particular, the partnership to carry freight is likely to deny profitable avenues to increase revenues in the years ahead, apart from creating bottlenecks in the rail network. The short-sighted strategy of "managing" the crisis is reflected in Lalu Prasad's proposed plan to reduce the wagon turnaround time from six days to five and allowing the private sector to run container trains, thus ending the monopoly of the Container Corporation of India. It is not surprising that the Pink Press, normally known for heaping scorn on Lalu Prasad, has this time showered accolades on him for initiating these "reforms" in the Railways.

While imposing a squeeze on the Railways by denying funds for fresh investment in rail infrastructure, the government has goaded it to implement new projects through Special Purpose Vehicles (SPV). This is not difficult to understand, given its eagerness to "reform" the Railways. The device of SPVs would enable them to work outside the general framework that governs the functioning of the Railways. This implies parliamentary scrutiny and accountability. Moreover, SPVs are primarily devices to "island" new projects, particularly because they provide a measure of comfort to private investors.

However, even by the yardsticks that govern SPVs, there has been gross under-funding of SPVs established by the Railways. For instance, the National Rail Vikas Yojana, which was launched in 2002 and drew inspiration from the Golden Quadrilateral road project, was to cost Rs.15,000 crores; but it was allotted only Rs.500 crores in the Railway Budget for 2003-04. Since then although further accretions have been announced, the SPV is nowhere near securing enough funds to complete the project. The point is that SPVs are meant mainly to make projects attractive to private partners. However, the "islanding" will ensure that revenue streams that become available after the completion of such projects will not be available to the Railways.

The Railways' ambitious attempt to develop a uniguage system has resulted in substantial decongestion along the main routes connecting the metropolitan centres. However, it is becoming evident that the Railways need to develop alternative routes to reduce congestion. This calls for substantial investment in track, rolling stock and other rail infrastructure. Indeed, the resource constraint imposed on the Railways needs to be placed in this context.

The Railways, like most other publicly owned organisations, are often run down; indeed, it has become fashionable to do so. However, the fact remains that the railway is the easiest and the most cost-effective means of moving people and goods. This advantage is amplified by the fact that in environmental terms the railway is a far better option. Transport experts point to the fact that there is a new wave of interest in developing rail networks across the world. Comparisons between China and India are often made, particularly when reforms are discussed. But the fact is that between 1992 and 2002 China invested about $85 billion in its rail network; during the same period India invested $17 billion in railway infrastructure. In terms of performance, too, according to one estimate, the Chinese rail system moved more than double the traffic moved by the Indian Railways in recent years.

The prolonged neglect of railway infrastructure has meant that the Railways' share of traffic - goods as well as passengers - has declined steadily over the years. The Railways' share of goods traffic was more than two-thirds in 1947; it accounts for just 40 per cent now. The most important reason for this lies in the failure to develop new track. While the length of the road network has increased ninefold (from 4 lakh km to 36 lakh km) since 1947, the track length has increased from 54,000 to 62,000 km in the same period.

It is obviously unfair to blame Lalu Prasad for all that is wrong with the Railways. However, this Budget possibly heralds a shift in his political outlook - from one who placed all his cards on the social justice plank to one who has hitched his wagon to the "reform" bandwagon.

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