Some of the measures announced in the Railway Budget could soon begin to take a toll of the centrality of the Budget in setting investment options and targets.
RAILWAY Minister Nitish Kumar did the hard work of raising fares last year, also remedying in the process the legacy of two years of relatively benign Railway budgets that his predecessor had bequeathed. Presenting the second Railway budget of his renewed tenure in the Ministry, Nitish Kumar could afford to chart a fairly relaxed course. This was a circumstance of some convenience, since the Railway budget for 2003-04 is likely the last opportunity he will have to cultivate a political constituency prior to the next general elections.
The Minister took his chances with practised aplomb, serving up as populist a budget as any. Fares have been retained unchanged for the most part, and reduced fractionally for the higher-end Rajdhani and Shatabdi services. Freight rates, which have reached the limit of their upward flexibility and would only reward further increases with declining volumes of traffic, have been rationalised.
The impact on costs to the user is expected to be marginal. Incentives have been provided for short-distance freight carriage by rail, giving a new edge to the Minister's intent to win back traffic that has been lost to the roadways. And a record of sorts has been set with the Minister's promise to introduce as many as 50 new express and mail trains. Extended runs have been provided for another 24 and increased frequencies of operation for no fewer than 13.
Just over a week later, the Railways, with remarkable understatement, announced that it was discontinuing three of its Shatabdi services on grounds of non-viability. Opposition members in Parliament wondered why the Minister chose not to bundle up the bad news with the good. Evidently, the purpose of the budget was to prioritise the good news and gloss over the rest.
If transparency was a victim of the rather opportunistic course chosen by the Railway Minister, some of the specific measures announced this year could soon begin to take a toll of the centrality of the budget in setting investment options and targets. The very first programme that the Minister chose to mention in his speech, in fact, was a "non-budgetary initiative", which, in the near future, is likely, to become the centrepiece of the Railways' development plans. In August last year, the Union government announced an ambitious Rashtriya Rail Vikas Yojna, though the budget for the year had conceived of no such programme. In January this year, Rail Vikas Nigam Ltd. (RVNL) - a wholly owned corporation of the Union government - was incorporated to implement the Yojna. And the budget for the year 2003-04 provides for an investment of Rs.730 crores in the equity of the new corporation. The future course of this Yojna will presumably be dictated entirely by the volume of funds that the new corporation will be able to mobilise through borrowings.
Nitish Kumar put the total investment involved in the Yojna at Rs.15,000 crores over an unspecified time horizon. The figure is significantly higher than the annual plan outlay of the Railways. Of the total, by far the largest part - around Rs.8,000 crores - would go towards "strengthening the Golden Quadrilateral and its diagonals through identified sub-projects". A loan of $314 million has already been contracted with the Asian Development Bank and negotiations with the World Bank for further loans are underway. Other projects conceived under the Yojna would include improving rail connectivity to major ports and constructing five "mega-bridges" at strategic locations.
SINCE the mid-1980s, the Railways have been tapping the capital markets to meet a part of their investment needs. For the last several years, Indian Railway Finance Corporation Ltd. has been floating an average annual quantum of Rs.3,000 crores worth of bonds. The interest incurred on this debt today constitutes just under 10 per cent of the Railways' revenue. This aside, the Railways' annual infusions to the Konkan Railway Corporation (KRC) - which implemented the long awaited West Coast Rail Project through equity and debt financing - continue at high levels. The 2003-04 budget provides for a loan of Rs.280 crores to the corporation, which is barely meeting its operational costs, far less servicing its equity and debt.
In the early part of the current government's tenure, there was a sharp disagreement between the Railways and the Finance Ministry over the appropriate quantum of budgetary assistance for the Railways' plan. Though budgetary support was increased substantially in 2000-01, the incumbent Railway Minister, Mamata Banerjee, gave little ground, refusing to raise rates in the manner required. The outcome was a sharp decline in the Railways' plan outlay and a serious depletion of all its reserve funds. And despite this, the Railways were unable to fulfil their dividend payout obligations for the year.
A fresh covenant between the Railways and the government was worked out shortly after Banerjee's exit from the Ministry. An assurance of higher budgetary support was held out, provided the rates were periodically revised to reflect rising costs. The Railways in turn were to restore dividend payouts to prescribed levels.
Reflecting the new spirit, a full dividend payment was made in 2002-03, though the liability of two years of deferred dividend remained undischarged. The budget for 2003-04 provides for full payment of the current dividend and a partial discharge of the deferred liability.
Budgetary support to the Railways' annual plan, in turn, has been set at Rs.5,740 crores, an increase of a mere 5 per cent over 2002-03. The rest of the Railways' net plan outlay of Rs.12,918 crores will come through appropriations to its various funds and borrowings of Rs.3,000 crores. In addition, a sum of Rs.1,350 crores has been earmarked for transfer to the newly created Special Railways Safety Fund, a gesture which would, in the context of the appalling sequence of accidents over the last year, provide some much needed comfort to users.
SAFETY was a strong theme in the budget speech this year. The Minister announced that the "anti-collision device" - a satellite-based system recently developed by the KRC - would be installed on a number of routes, starting with the Northeast Frontier Railway. Technical experts are not yet convinced about the cost effectiveness of the new system, as against the conventional method of "track circuiting", which also was given high priority in the budget speech. But finally, the outlay on "signalling and telecommunication works", which include many of the components that have a crucial bearing on safety, amounts to just Rs.704 crores, fractionally below the level for 2002-03.
Few changes of priority are evident in the investment plans the budget has rolled out. Gauge conversion has taken a marginal cut, while the outlay on new lines has been increased. In the context of the ambitious programme of new services that has been announced, the outlay on rolling stock remains rather modest. The detailed specification in terms of numbers of locomotives, coaches and carriages that the Railways intend to acquire this year, also fails to reflect a major increase in the number of mail and express trains.
In the years to come, the Railways would have to contend seriously with the problem of diminishing returns. Freight rates, which took the burden of most of the increase over the last decade, now offer little further scope for yielding additional revenues. And passenger fares after the sharp hike last year also have fallen below target. The total revenue from passenger services in 2002-03 is now expected to be just over Rs.5,022 crores - a drop of almost 3 per cent from the previous year. The fall in traffic has been undiscriminating between classes and has affected even suburban passengers. An explanation in terms of the general recessionary conditions would not stand scrutiny, since that should equally - or perhaps more strongly - apply to freight traffic, which has increased. The Railways have taken the obvious lesson, that passenger traffic has reached a point of negative elasticity with respect to price. That leaves it with an unresolved problem of where to place the burden of revenue raising in future years.
The debt financing option is not one that the Railways management is very comfortable with, and for good reason. Though it has bridged a long-standing lacuna in the railway network, the KRC has not quite managed to adapt to the highly debt-leveraged mode of its financing. The chief executives of the zonal railways are known to be averse to routing their freight traffic through the KRC, since that would impinge on their target fulfilment.
This offers a rather uncertain prognosis for the future of the RVNL. Since its territorial jurisdiction would be the "Golden Quadrilateral and its diagonals" linking the four major metropolitan centres, to ensure its viability it would, need to encroach directly into some of the most traffic-intensive and profitable domains of the Railways. It seems a rather remote possibility that freight traffic between the four metros would increase sufficiently to meet the Railways' need for revenues and the RVNL's debt servicing obligations. That may well be the central problem inherent in the debt finance route that the Railways have reluctantly embarked upon.
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