Railways need to change track to go full steam ahead

Updated: Jan 31 2002, 05:30am hrs
The governments declared intention of pump-priming the economy sets the parameter for the Railway Budget for the opening year of the Tenth Five-year Plan. The budget has to cater for the moderate growth of 6.5 per cent, indicated by Planning Commission member N K Singh, to avoid becoming a drag on the development of the country.

Against the Rakesh Mohan Expert Groups estimate of Rs 70,000 crore, the Indian Railways (IR) are pitching for a medium growth strategy, requiring Rs 65,000 crore in the next Plan, counting out the Rs 17,000-crore Special Railway Safety Fund (SRSF) projects. The required level of capacity generation at the end of the Plan will be possible only with proportionately larger investments early on in the Plan. A daunting Annual Plan of Rs 14,000 crore, excluding the SRSF projects, appears imperative.

Performance in current year
In freight traffic, IR is falling short by 15 million tonne (mt), down from 500 mt to 485 mt, with a revenue loss of over Rs 750 crore. Reduction in lead causes another drop of Rs 250 crore. There is, however, a commendable reduction of working expenses of around Rs 800 crore, reducing the net deficit to around Rs 200 crore.

Non-materialisation of expected realisations of Rs 750 crore from the freight owed by power houses, and Rs 750 crore through RailTel, and shortfalls in Own Your Wagon Scheme (budgeted Rs 100 crore) and, BOLT schemes (budget Rs 900 crore) have depressed the total resources by around Rs 1,500 crore. The budgeted Plan outlay of Rs 11,090 crore will, therefore, suffer a minimum Rs 1,000 crore cut.

Presidential directives are reported to have been issued to IRFC (Indian Railway Finance Corporation) and IR-controlled public sector enterprises to help RailTel through loans and equity participation. If we go by the bitter experience of the Unit Trust of India and other financial institutions, this will be like setting up an inter-institutional Ponzi Scheme, which should be avoided at all costs.

Projections for budget year 2002-03
Freight traffic of 500 mt, yielding Rs 25,000 crore and a 5 per cent growth in passenger traffic, providing Rs 12,070 crore appear to be feasible targets. Retaining unchanged, Rs 900 crore from other coaching and Rs 850 crore from sundries, the total receipts will be Rs 38,820 crore. A 10 per cent increase will take expenses to Rs 39,209 crore (with Rs 6,000 crore for pensions), causing a deficit of Rs 389 crore. To this is to be added depreciation provision of Rs 2,500 crore not made, and a similar sum for dividend to general revenues.

Deferment of dividend for the third year in a row, with adverse impact on the credit rating of IRFC, and also borrowing from general revenues for depreciation provision seem to be inevitable. Parliament-approved procedures exist both for borrowing DRF (depreciation reserve fund) and deferment of dividend to general revenues.

High freight rates have already driven traffic to the road, and any further hike in them will be suicidal. But some revenue-neutral upward revision of freight classification of traditionally exempted categories of goods, like chemical fertilisers, foodgrain, salt etc, and downward adjustments for POL (petroleum, oil, lubricants), steel, electrical goods, cement and so on appear necessary. IR, for its own survival, will have to raise passenger fares by about 25 per cent over the next two years. They may be raised by 10 per cent across the board, except for AC I class, where it will be counter-productive, yielding around Rs 1,000 crore.

Debt-driven Annual Plan
This annual plan will almost wholly be a debt-driven one. And its size will depend on the budgetary support provided as capital-at-charge and loans by general revenues. The governments emphasis on increased public investments raises the hope for increased budgetary support of around Rs 6,000 crore, along with an interest-bearing loan of Rs 2,500 crore for DRF and deferment of the dividend payable by IR. Borrowing by IRFC needs to be pegged at Rs 3,000 crore which will enable a Plan size of Rs 12,500 crore. The balance will have to come from all other sources BOLT, Own Your Wagon Scheme, and internal economies. The contemplated levy of service tax on passenger services, to be used as the governments contribution to the SRSF, will severely restrict IRs ability to rationalise the passenger fares and will make a mockery of the governments commitment. This sadistic proposal of robbing Paul to pay Paul himself needs to be nipped in the bud.

Reforms and restructuring
That restructuring and reforms are necessary to rehabilitate IR is universally accepted, but wide divergence persists in the solutions prescribed.

Restructuring: Reorganising the Railway Board on business lines, (eg. passenger and freight services), and making each member, with associate finance, responsible for a particular business line might be advantageous. Additional members could be empowered to run the Railways, with board members concentrating on policy aspects.

Increasing internal resources: There is a need to increase the market share through intensified marketing efforts and innovative measures, with special rates, including volume and loyalty discounts, and necessary safeguards against witch-hunting to enable decision-makers to adopt these measures without any fear or inhibitions.

Economy measures: These are needed for results in the short term. Some ideas worth pursuing are:-

* Prune the long list of sanctioned projects to secure consequential reduction in the massive construction establishments.

* Eschew non-viable projects to avoid wasting of scarce investible resources and incurring operating losses often perpetually.

* The overdrive in electrification and gauge conversions should be halted. There should be no hesitation to run diesel engines on electrified routes as the advantages claimed for electric traction have not materialised.

* There should be transparency in furnishing details of projects in the works programme, including the rate of return against each project. The White Paper on Projects did not furnish this and even the Budget documents presented to Parliament suppress them, despite an Estimate Committee recommendation requiring furnishing of full details. Hopefully some public spirited member of Parliament will take up the issue of transparency.

* Rules requiring post-commissioning reviews, to learn from past mistakes, need to be enforced.

* The conveniently forgotten rule that no new train or service should be introduced without being financially justified needs to be adhered to.

* Introducing modern maintenance technologies and practices, redeploying manpower for maintenance rendered surplus by sophisticated track maintenance machines, writing off of assets rendered redundant or obsolete by technological upgradations and innovative operating practices and so on can lead to significant economies.

Financial sector reforms: These relate to introducing commercial accounting system, proper depreciation accounting, revamping of costing to bring out acceptable costs of various services and to generate cost consciousness at all levels, and undertaking of a comprehensive capital restructuring to make the capital structure suit the requirements of a commercial enterprise.

Alternative reform model
To avoid a reverse transfer of power from the political class to the business class, reforms can be attempted without having to part with the ownership of IR. It is idle to expect that IR can escape social responsibilities altogether. Some of it is inescapable, but it needs to be limited to sustainable levels by increasing the commercial orientation of IR. This can be achieved through a National Railway Policy in the form of a Charter for Indian Railways recommended by the Poulose Committee.

The nation is anxiously waiting for a clear indication of a direction that IR would take in reforming and restructuring itself. The forthcoming budget speech of the minister of railways should contain a full section on these aspects. It is my firm belief that the minister will not disappoint us.

(The writer is former Financial Commissioner, Railways, and ex-officio Secretary to the Government of India)