Feel-good train

Railway Budget 2007-08 draws all-round cheer, but the claim of a turnaround appears too good to be true.

NO politician has undergone such a dramatic image makeover as Lalu Prasad, Union Railway Minister. Castigated for his ways and ridiculed by the media for many years, he has suddenly been transformed into a management guru under whose leadership the Indian Railways have undergone a remarkable "turnaround".

During the last six months preceding this year's Railway Budget, he claimed that the Railways' profits by the end of the financial year 2006-07 were likely to exceed the projections he made during his last budget presentation. And, when he presented his budget on February 26, he drew all-round applause by announcing that the Railways were likely to end 2006-07 with a cash surplus of Rs.20,063 crore (before payment of dividend).

Even on a post-dividend basis the performance appears truly impressive; the cash surplus has increased by a whopping 65 per cent over what he expected when he presented the budget for 2006-07 last year. However, in the din of applause Lalu Prasad's projection that the cash surplus would increase by only 7.55 per cent in 2007-08 was lost. In fact, the net surplus - after payment of dividend - that is available to the Railways will actually decline in 2007-08. Even as critics poured over the numbers behind the turnaround, Lalu Prasad's charm offensive had won the day.

Although Lalu Prasad attributed this remarkable turnaround to the improved efficiency of the Railways, it is evident that simply "better management" cannot explain the dramatic increase in surpluses. On closer examination of the numbers in the budget papers it turns out that a combination of innovative accounting practices on the one hand and some changes in key commercial practices on the other, have enabled Lalu Prasad to ride the feel-good train as no other Railway Minister has in recent times.

Lalu Prasad has chosen to focus on the surplus because it provides a ready measure of "performance". He realises that if surpluses can be shown to have increased dramatically, then the rest hardly matters. Starting with the revised estimates for 2005-06, the Railways' accounting system made some changes that removed the allocations for the Depreciation Reserve Fund (DRF) from its classification of working expenses. This had the effect of inflating the "cash surplus" projected in the Railway Budget. Although allocations towards the DRF were deducted from the cash surplus to arrive at the "net surplus", the Minister's projection of higher cash surpluses sounded much better to those not familiar with the Railway Budget. Moreover, other changes in the classification of expenses enabled the Minister to reduce the "expenditure side" of his budget, which had the effect of exaggerating the surplus.

For instance, the new format shows only the interest portion of the lease charges paid by the Railways for rolling stock such as wagons, which it leases - for instance, from the Indian Railway Finance Corporation - as part of expenses. Repayments of principal figured under a different head in the capital account. While there may be no quarrel on grounds of principles of accountancy, it is evident that the budget papers do not enable a fair comparison of how the Railways are performing relative to their performance in the past.

Even after accounting for changes in the way the accounts are presented, there can be no denying the fact that revenues of the Indian Railways have increased sharply in the last two years. The question is whether this can be sustained. The projections for 2007-08 indicate that the Lalu magic may begin to fade in the next financial year.

The Indian Railways' performance in terms of movement of freight - from which they earn two-thirds of their total income - was truly remarkable in 2005-06 and in the following year. Gross traffic revenues increased by 16 per cent in 2006-07 (revised estimate) over levels registered in 2005-06, after having increased by over 15 per cent in the previous year. This was made possible by increasing the carrying capacity of the Indian Railways without actually adding a single wagon to its rolling stock. Lalu Prasad did this in 2005-06 by allowing each wagon to carry an additional four to eight tonnes.

In fact, in his budget speech last year, Lalu Prasad claimed that he had found an additional freight carrying capacity of 100 million tonnes, resulting in Rs.5,000 crore of extra revenue. "This," he said, "is the foundation of our financial turnaround." Sceptics, among them senior railway officers, have expressed dismay that railway assets are being flogged with no concern for safety.

Obviously, there are limits to what can be achieved by a one-time step-up in capacity. The same applies to what can be achieved by accounting ingenuity. The figures speak for themselves. First, the 100-million-tonne increase in freight capacity is not reflected in the budget papers (see chart). Second, gross traffic revenues will grow at a slower pace next year, while growth of earnings through passenger traffic is projected to remain stagnant. Third, the growth of total receipts - from passenger as well as freight traffic is - projected to decelerate in 2007-08.

But the most significant aspect of the Lalu effect on the Indian Railways is going to be felt in the area of freight traffic. In 2005-06, revenues from freight traffic increased by a healthy 17.9 per cent. This sharp increase was obviously made possible by the additional load allowed on rail wagons. In 2006-07, the trend continued, but even Lalu Prasad expects that the Indian Railways will lose steam in the following year.

Earnings from freight carriage are expected to increase by only 10.98 per cent in 2007-08, which is more than 5 percentage points below what the railways are expected to achieve in 2006-07. This will have a telling effect on Lalu Prasad's magic statistic, captured under the head "cash surplus before dividend".

Many of the promises in the Railway Budget, which drew widespread cheer, are actually contingent on factors that have not been readily understood by common folk. For instance, while Lalu has promised to reduce Air-Conditioned Three Tier fares for passengers, these are only applicable on coaches with a capacity of 81 passengers.

Currently, only coaches with a capacity of 64 passengers ply the rail network; the reduction in fares will not be available to passengers travelling on these coaches. The new 81 passenger coaches are unlikely to be on the network before the end of the next financial year. Even when they start rolling out they will still be only a fraction of the Railways' capacity.

It is indeed true that the tremendous potential of the Indian rail system can be exploited by undertaking investments in new capacity - not only in fresh rolling stock but also in new lines and in modernisation. But Lalu Prasad's new-found enthusiasm for Public-Private Partnerships (PPP) threatens the very financial viability of the Indian Railways.

The concept of dedicated freight trains and dedicated freight corridors, which is already being applied to special container trains on routes with high traffic potential, is likely to divert profits from the Indian Railways to private operators. Dedicated freight trains, operated by private companies to move their own cargoes, will choke a profitable source of revenue for the Railways. Dedicated freight corridors, which are likely to be built by private parties on routes where there is a high density of traffic, will make it more and more difficult for the Indian Railways to operate routes that are not as remunerative.