1. Rail Budget 2016 good in intent

Rail Budget 2016 good in intent

But there’s need to bring finances back on track

Updated: March 2, 2016 1:49 AM

The focus of the Railway Budget remains on medium term measures to improve passenger services, optimising revenues using new sources and cost reduction using innovative procurement methods. The FY17 revenue based on traffic receipts will remain muted in view of moderate growth in freight business and no fare or freight hikes being proposed. The increased wage bill due to the pay commission recommendations will drive the operating ratio down to 92% from the current 90% level.

In order to decongest important routes and trunk lines, as also to enhance electrification and gauge conversion, the Railway Minister has increased capital expenditure to R1.21 lakh crore. He proposes to fund this investment using both budgetary support and external budgetary support. While in the short term this could be reasonable, sustainability over long term will need to be closely looked at.

The Railway Minister has also proposed a number of internal organisational and process improvement measures towards restructuring of the organisation. Focus on ERP, Analytics, if implemented successfully, will be welcome moves. The budget, in sum, appears good in intent, but implementation will have to be watched with interest. Financial resource augmentation will be the key challenge.

Some of the points that need to be discussed in detail are :

The budget announced higher capex spending, which includes investment in new freight corridors, continuing emphasis on new lines and electrification, and new projects in logistics and cold storage. The direction in this budget towards capex is on expected lines, to achieve the five-year goal stated last year. In FY 2016, Indian Railways (IR) is stated to have achieved a capex of about Rs 90,000 crore. Roughly 2500 km of BG track was laid in FY16 and 1600 km electrified. The budget projects growth of new track capacity from a level of 4.2 km a day of earlier years to 7 km a day this year and to 19 in FY 2019. Existing dedicated freight corridors contracts are stated to be all awarded by 31 March 2016. Three more freight corridors have  been announced.

Gr6

The financing plan for creation of infrastructure remains unchanged from last year. Getting LIC line of credit of R1.5 lakh crore was a major achievement for the current year as also were some JVs with state governments and agreements with major users like Coal India. The availability of funds from these sources is stated to be on favourable terms though concerns remain about the time period and quantum of such easy lending in the future.

The budget also reiterates emphasis on IR’s PPP cell. The railways has fallen short of the freight target for the year and yet shows a surplus budget. The operating ratio at 91.3% last year, targeted to be 88.5% this year, has been stated to be 90.5%. Reduction has been largely possible on account of reduced appropriation to Depreciation Reserve Fund and dividend payable to General Revenues. The clear message from this year’s performance is that there has to be some innovative thinking towards generating higher total receipts and further reduction in costs. To this end, the budget emphasises the need to earn more from non-fare box revenue.

Alongside, various measures to arrest the decline in modal share of freight traffic by rationalising the tariff structure, expanding the freight basket and building terminal capacity have been announced. Clarity in terms of setting/rationalising the freight tariff potentially including rate stability over a period of time, system of reward and penalty mechanism built in for transit guarantees,  etc. is desired. IR needs a  restructuring of its freight charge policy from an expenditure-revenue arithmetical computation to a marketing tool in a competitive market.

As a measure towards expanding the freight basket, the budget expresses a need to encourage container transportation on IR. This would help convert road-hauled cargo to rail and de-risk the rail business currently dependent on a few bulk commodities.

A slew of service improvement measures have also been introduced. Against stated service improvements, and having achieved some last year, this was perhaps a good opportunity to increase fares across the board.

The budget has recommended a reorganisation in IR along functional lines. It has proposed to set out seven missions to focus on specific issues of operational improvement.  It will be interesting to see the structuring of these missions and the outcomes.

IR had issued a concept paper on RDA on 1 January 2016. While the budget mentions a draft bill, aspects like a  mechanism for transparent costing and efficient accounting systems, expertise in RDA on a multiplicity of sectors to be able to link tariffs with market requirements need further clarity.

Overall, the budget follows the roadmap drawn last year and the intent looks positive, but challenges remain and it would be interesting to watch how the Minister meets these challenges.

Revenue from traffic receipts will remain muted in view of tepid growth in the freight business and absence of fare or freight hike

Sharat Misra is Advisor, Deloitte; Peeyush Naidu & Vishwas Udgirkar are Partners in Infrastructure Consulting of Deloitte Touche Tohmatshu India LLP

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