With Indian Railways’ traffic receipts set to be flat, Budget 2017 may retain capex plan to ensure expansion

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New Delhi | Updated: January 19, 2017 11:11:56 AM

With traffic receipts falling way short of target in a stuttering economy, Indian Railways will need to aggressively curb its working expenses to produce even the meagre surplus budgeted for FY17.

While the transporter’s gross traffic receipts (GTR) grew 5% against a targeted 16% last year, the GTR growth this year could be flat — if not slightly negative — against a modest 10% growth projected. (PTI)While the transporter’s gross traffic receipts (GTR) grew 5% against a targeted 16% last year, the GTR growth this year could be flat — if not slightly negative — against a modest 10% growth projected. (PTI)

With traffic receipts falling way short of target in a stuttering economy, Indian Railways will need to aggressively curb its working expenses to produce even the meagre surplus budgeted for FY17. While the transporter’s gross traffic receipts (GTR) grew 5% against a targeted 16% last year, the GTR growth this year could be flat — if not slightly negative — against a modest 10% growth projected. So, to maintain even the estimated grim operating ratio of 92% — which itself was worse than the 90% achieved last year with rigorous cost reduction — the transporter will have to starve the crucial depreciation fund, which is meant for replenishing infrastructure.

Alternatively, a decent amount could be earmarked for the depreciation fund and the railways could admit that it is running a deficit.

However, finance minister Arun Jaitley, who will unveil the railways’ financial numbers in the general Budget on February 1, is unlikely to digress from the ambitious project to expand India’s rail networks and facilities with large capital deployment. With the carrier’s internal surplus being nil or paltry, the requisite funds, as in the last couple of years, will come from multiple sources, including the central Budget, but largely from market and via institutional and multilateral borrowings. While the “excess” from own operations this fiscal is budgeted to be around R8,500 crore, lower than last year’s R11,400 crore, the transporter will struggle to produce even that — which means that the internal allocations for capital and development funds would be far from adequate.

The transporter, which had set a R1.21-lakh-crore capex (Plan outlay) target for 2016-17, spent close to 60% of that by December end, a Railway Board official told FE, on condition of anonymity. The capex target for 2017-18 will be higher by at least R15,000 crore over this year’s.

During April-December 2016, the railways garnered just R1.19 lakh crore from its core transportation business against a target of R1.34 lakh crore, a negative variation of 11.25% from the budget estimate. That means that the GTR in the first nine months of the fiscal was trailing the budget estimate by about R15,000 crore, almost as much as the GTR shortfall reported for the whole of last fiscal.

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In the FY17 budget, GTR is pegged at 97% of the total earnings. To diversify its revenue stream, the railways, in the last budget, embarked on a journey to raise non-fare receipts from an abysmal 3% now to above 10% or R16,000 crore at the current revenue level; for instance, parcel leasing revenue of R4,000 crore is targeted for 2016-17. In line with this strategy, the carrier last week announced the initiation of various non-fare revenue policies such as advertisement on trains and other assets, which is expected to fetch R18,000 crore by the end of the contract periods. The FY18 budget might reflect an accentuation of this strategy. However, these could yield significant results only in the medium term.

The transporter, which is losing both passenger and freight volumes to airlines and truckers, saw its traffic receipts in April-December 2016 down 2.53% from the R1.22 lakh crore achieved during the year-ago period. In the passenger revenue segment (which accounts for about a third of the total traffic earnings), the carrier missed the target by 9.14% and in the profitable goods category the shortfall was 10.98%. This is despite various initiatives taken to boost its revenue during the current financial year, including the flexi-fare scheme for high-end tickets on select premium trains. After introducing the system, also called surge pricing, on September 9, it, however, witnessed a fall in passenger revenue from these segments on a month-on-month basis. The revenues from these segments, however, picked up after the government’s demonetisation move as passenger bookings were allowed in demonetised currencies in November-December. According to the Railway Board member quoted above, traffic receipts could accelerate in the last quarter of the financial year and receipts this year could finally match last year’s.

To increase freight revenue, the railways withdrew dual freight policy for iron ore, port congestion charges and busy season charges. It also introduced the merry-go-round system tariff rationalisation for coal usage by thermal power plants among the almost 15 measures taken. However, these measures are obviously not enough to offset the adverse impact of the low growth in loading of goods, including bulk commodities like coal.

The transporter’s social service obligations continue to be very high at about R33,000 crore. About 60% of the railways’ revenue goes into salaries and pensions. The railways is also spending around R28,450 crore due to the pay hike recommended by the Seventh Pay Commission (of which R20,500 has been provided for in FY17 budget).

In 2015-16, helped by a decline in fuel costs, the railways saved R8,720 crore on ordinary working expenses. Significant savings are likely on this front in the current year as well. Last year, railway minister Suresh Prabhu managed to control the railways’ overall expenditure: It grew only 5.4%, compared with a CAGR of 9.8% in the previous five years.

According to Abhaya Agarwal, partner-transaction advisory services, infrastructure and PPP with consultancy firm EY, external factors have not been good for the transporter. “There has been a lack of demand from the coal and cement segments,” he said. Agarwal said that the non-fare revenue box should be expanded and the railways should move from slogans to real drivers under this head. He added that the carrier should also rationalise trains to increase speed and reduce congestion. “Once the core sectors pick up, it (the railways) should be ready to provide service which will require augmenting infrastructure and clearing the huge backlog of projects,” said Agarwal, adding that the carrier should also think of ways to reduce its cost for staff which is too high as of now.

According to the official quoted above, the railways spends 76 paise per passenger km and realises 36 paise whereas in the freight 100 paise is spent per tonne km while realising 155 paise. The official added that spending requirements go up R5,000-10,000 crore per year, which adds to the operating ratio, which denotes how many paise are spent to earn every rupee.

In terms of capital expenditure, the target for the current year is part of a cumulative target of R8.5 lakh crore in the next five years. The railways is also toying with the idea of setting up a tariff regulator, as proposed by NITI Aayog’s Bibek Debroy, which will be an independent body. The Budget is likely to announce the setting up of the regulator. There could also be a new momentum in monetising non-operating assets like vacant land, estimated to be about 48,000 hectares.

By- Saurabh Kumar

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