The Indian Railways’ (IR) debt servicing costs are set to rise at a much faster clip starting FY21 and might more than double in five years from now as repayment obligations concerning Dedicated Freight Corridor Corporation of India (DFCCIL) and the proposed high-speed train network will kick in (see chart). With its capacity expansion/asset replenishment projects already on a slow lane — against this fiscal’s capex budget of Rs 1.46 lakh crore, the sanctioned projects are worth over Rs 5 lakh crore —, the transporter is at the risk of a putting a freeze on new projects.
According to official sources, as the railway ministry raised this issue with the finance ministry recently, and asked for a 40% increase in this year’s (FY19) gross budgetary support (GBS) from the budgeted level of Rs 53,060 crore, the latter has instead asked the IR to borrow the extra amount and promised that it would pay up the principal part of the loan as and when the repayment begins. But the railway ministry, the sources said, declined to accept this offer as it felt its borrowing limits are being tested already. For FY19 itself, the IRFC bonds (the conventional market borrowing tool for IR) to be issued are worth Rs 28,550 crore and the transporter is scheduled to raise another Rs 26,440 crore from institutional sources (Life Insurance Corporation), through issuance of 30-years-tenor bonds to the insurer by IRFC.
“We cannot have unlimited borrowings… Too much of reliance on the market could impact the perception about our creditworthiness and raise our costs,” said a railway ministry official, requesting anonymity.
While the insurance regulator Irdai’s single-entity exposure cap for insures had come in the way of raising funds form LIC — as per a March 2015 memorandum of understanding between the transporter and LIC, insurer will provide a financial assistance to the tune of Rs 1.50 lakh crore to the latter’s identified projects between 2015-2019 —, the government has recently addressed this issue by providing government guarantee to the IRFC bonds issued to LIC sans any limit.
The North Block is believed to be have mooted reducing GBS to zilch and repayments from the consolidated fund of India of principal amounts of IR’s resultant (enhanced) borrowings — this will help the central budget in the short term because the repayment obligations will be only a fraction of the current GBS size in the initial years.
However, the railway ministry reckons that this is not a viable proposal. While the railways doesn’t have any extra borrowing room given its stagnant revenue receipts, a large chunk of projects are non-remunerative and are, therefore, not meant to be funded via borrowings, the ministry argues. Further, an equity infusion in a clutch of railway PSUs cannot be done via borrowings and requires to be funded out of the budget. Also, multilateral loans from World Bank and JICA, etc, require to be routed through the budget for sovereign protection to the lenders. A win-win situation, analysts said, could be the finance ministry — read the central budget — bearing the entire future debt servicing costs (principal and interest) of the transporter while retaining a part of GBS, roughly half the current level, for “nationally important” (unprofitable) projects and multilateral funds.
Of course, the viability of even this model hinges on how fast the railways could restructure its tariff regime with a view to reduce the cross-subsidy to the passenger segment — around Rs 30,000 crore — and accelerate freight earnings by arresting the loss of traffic to the road segment. The transporter had reported its worst operating ratio since 2000-2001 last fiscal, at 98.5%, even after several last-minute accounting adjustments; foolproof accounting will no doubt raise the ratio to beyond 100%, indicating an operational deficit.
Even after the merger of the rail budget with the central one, the railways’ pension bill — close to Rs 47,000 crore last fiscal thanks to the Seventh Pay Commission-induced hikes — is shown on its own books, as part of revenue expenditure. The railway ministry has demanded that the central exchequer should handle the pension of 14 lakh railway pensioners too, just as it does of other government employees. “We may also be allowed to reduce our borrowing costs by access to National Small Savings Fund,” a said the official quoted above. The official added that from the transporter’s side, the scrapping of some of the non-viable projects and giving priority to “last-mile projects” (commissioning of projects with earnings potential, where substantial work has been done) would be the right approach.