A balancing act

The Railway Budget imposes major burdens on users but fails to augment the Railways' financial reserves in any significant manner.

GOING into the first Budget of his renewed innings as Minister for Railways, Nitish Kumar was under certain unavoidable compulsions. The two intervening Budgets had been deeply marked by his predecessor Mamata Banerjee's populist commitments. Moreover, two years of relative restraint in revenue mobilisation had caused sharp inroads into the Railways finances. Reserve funds had been depleted to perilous levels and a succession of defaults had occurred in dividend payments to the government. Nitish Kumar has righted one of the anomalies, making provision for the full discharge of the Railways' dividend liabilities in 2002-03. But he maintains the deferred dividend liability from the two previous years at the level he inherited and fails to augment the Railways' financial reserves in any significant manner.

A dramatic reversal of fortunes in one year would have been an unrealistic expectation, given the depth of the malaise in the Indian Railways. The Railways also had to negotiate carefully its way out of a trap of diminishing returns that it had wandered into over the last decade. Freight had lost the flexibility to yield additional revenues since increased rates only accelerated the migration towards road traffic. And passenger rate increases, which offered better prospects for revenue mobilisation, were, politically speaking, an area that Railway Ministers have been averse to venture into.

Nitish Kumar has treaded cautiously in dealing with these conundrums. He has opted not to impose an "across the board" increase in freight rates and couched his proposals in terms of the overdue task of "rationalising" the multiplicity of applicable rates. Arching over these changes, supposedly, is the Railways' declared priority of regaining the share of aggregate freight traffic it used to enjoy before the decline set in over the last decade.

The fine print of the budget documents points to certain commercial calculations whose underlying rationale is not self-evident. If the prospect of competition from roadways is most serious in commodities that are moved in relatively small units, the Minister seems to have chosen precisely these to impose his major freight increases. For instance, foodgrains and pulses will be liable for freight charges that are 7.89 per cent higher than the existing rates over an illustrative distance of 700 km. Similarly, groundnut oil will be charged 11.84 per cent more. Other commodities that would attract markedly higher freight charges are the inorganic fertilizers, urea and ammonium sulphate.

With the expected quantitative increases in freight loading factored in, the Railways' earnings from this segment are expected to increase by Rs.1,508 crores in 2002-03. Of this, Rs.450 crores, by the admission of the Minister, would be on account of rate increases. A plain calculation would show that freight rate increases in foodgrain would contribute Rs.123 crores to this and, in fertilizer, another Rs.46 crores. Effectively, these two commodity groups, which together account for a meagre 18.6 per cent of the Railways' freight movement, would contribute over 37 per cent of the increased earnings. Moreover, unlike iron ore, pig iron and coal, these commodities do not suffer the disadvantages of large bulk and indivisibility that would make them unamenable to road movement.

Even if the Minister's argument that the rate increases in these items of mass consumption would not impinge on cost of living indices is accepted, intuitively there seems to be a problem with the commercial calculations inherent in them. Either the Railways are prepared to lose out on the movement of these commodities or they have lost sight of the overarching goal set two years back, to reverse the erosion of their share in total freight movements.

This prospect is all the more likely since the Union Budget that followed Nitish Kumar's exercise announced a grand plan to deregulate the movement of foodgrain all over the country. Presumably, no longer would the Railways be assured of highest priority as a carrier for foodgrain traffic. Of course, there is a tacit assumption that the restraint that has been enforced in rate increases for the major industrial commodities will secure for the Railways an increasing share in freight movements. But this remains a gamble based on an industrial recovery of which there is no sign as yet.

In the passenger segment, the Railways have returned to a formula that was first proposed in Nitish Kumar's Budget for 1999-2000. The approach then was to fix the second class fare in mail and express trains as the base, relative to which all other rates were to be specified in terms of a "relativity index". This index in turn, was derived from the estimated "comfort level" enjoyed by passengers utilising the different travel options. Hence, if the second class in mail and express trains was set to a base level of 100, the sleeper class was in 1999 set at 155, implying that it was estimated to be 1.55 times more comfortable. This figure has now been revised upwards, so that the sleeper class index is now 160. The airconditioned chair car, similarly, has ascended the scale of comfort and been pegged at 350 as against the earlier figure of 300. Other classes of travel have been retained at prevalent levels, with the exception of the airconditioned first class, which has been scaled back from an index of 1440 to 1400. This is not, as the Minister clarified, because it has been deemed less comfortable, but because it is being offered as a viable alternative to air travel.

WITH this hierarchy of comfort in place, the minimum second class fare for mail and express trains has been increased from Rs.15 to Rs.16. The magnitude of increase in the rest of the classes follows with a certain logic. The final outcome is an increase of 11.1 per cent in the average revenue earned from a passenger travelling by sleeper class in mail and express trains. Of course, this segment contributes over a quarter of the Railways' earnings on passenger movement. In the projections for 2002-03, this class of traveller will contribute almost a third of the Railways' additional revenue from passenger traffic.

All the upper classes on all trains together earn less for the Railways than the sleeper class traveller in mail and express trains. In the upper strata, while the airconditioned chair car traveller will pay an average of 19.7 per cent more for every kilometre he or she travels, the airconditioned sleeper and airconditioned three-tier passenger will pay an average of 6.5 per cent and 4.3 per cent more, respectively. Clearly, older notions of equity have been bypassed in the formulations of this Budget. However, whether the Railways' operating parameters will improve as a consequence remains to be seen.

The Railways' internal accrual of resources in 2001-02 fell far short of target. Projected levels of spending on Plan schemes were maintained only through a large infusion from the General Budget. As against a promise of Rs.3,540 crores that was made last year, the General Exchequer ended up contributing Rs.5,438 crores to the Railways Plan. Without this munificence, the Railways Plan would have fallen short of targets. It is probable that the coercive strategy utilised by Nitish Kumar's predecessor, of deferring dividend payments, induced the generous late infusions from the General Exchequer. If so, the Minister has sought to restore harmony. In return for assuring the government of a full discharge of dividend liabilities in 2002-03, Nitish Kumar has been assured of support from the General Budget to the tune of Rs.5,390 crores.

With internal accruals and market borrowings added on, the Railways Plan is expected to total Rs.12,330 crores in 2002-03. There are no clear shifts in priority evident, except for a major transfer of Rs.1,350 crores to the Special Railway Safety Fund, a newly created facility which has already been provided Rs.1,000 crores in the current year.

The emphasis on safety in Nitish Kumar's budget, which he attributes to the Kadalundi rail disaster in Kerala in June 2001, is undoubtedly welcome. But the utility of creating a new fund to deal with this aspect is not clear when the existing reserves - like the depreciation reserve fund, the railways development fund, and the capital fund - have been thoroughly depleted. In normal circumstances, these funds would be used to finance essential replacements and fresh capital assets. The new safety fund would now presumably appropriate a part of this function, though the same purpose could have been served by replenishing the depreciation reserve for one.

A key feature of the Budget is the formulation of a set of criteria by which allocations will be made for projects. Spread thin on account of competing claims from different regions, the Railways' resources have been inadequate to complete projects expeditiously. Nitish Kumar now proposes three tests to decide investment priorities among States: population, area and "throw forward", that is, investment required to bring a particular project to completion. This could provide greater efficiencies over the long term, though its immediate implications for projects begun in the mid-1990s with the best intentions of bringing better levels of service to neglected regions like northeastern India, could well be adverse.

Significantly, the Minister annou-nced a government decision to split the proposed Udhampur-Srinagar-Baramu-lla line in Jammu and Kashmir into two segments. He promised that the Udhampur to Katra and Qazigund to Baramulla sections will be executed separately and completed within three years. This would enable some level of service to start, leaving the most difficult terrain on either side of the mountain passes leading into Kashmir Valley for later years. The funding for these would be provided as an additionality to the resources of the Railways, as a signal of the priority that the government attaches to Jammu and Kashmir.