Armed with Rs 1,50,000 crore from Life Insurance Corporation (LIC) and lots of room to raise money through bonds, one was expecting Suresh Prabhu to ramp up the pace of capex. After all, it’s the roads and railways sectors that are supposed to be driving expenditure to kickstart the economy. Going by the stagnant spends on core capex in the five months to August, however, the railway minister’s plans to put Indian Railways back on track don’t seem to have gathered speed just yet.
Check out the capex that’s done directly by Indian Railways – electrification, doubling, conversion of gauges and so on – and it hasn’t budged. Numbers crunched by Ambit Capital show that at Rs 14,700 crore, the growth rate is zero%. To be sure some of it could be work-in-progress and it’s possible the trend could reverse in a few months time, but it’s surprising spends on rolling stock are down 60% year-on-year while those on track renewals are down 24%y-o-y. Some of this has been offset with higher spends on other areas – for instance, more new lines are being built and more of them electrified.
Also, the minister had, in a recent presentation, indicated there would be a focus on doubling – badly needed on routes such as Delhi-Kolkata – electrification; but even though the spends on doubling are up 62% y-o-y, it’s shade below the required run rate.
But total spends are going up – 12% y-o-y to Rs 21,300 crore – with much of this channelled into joint ventures and SPVs of Northern Railways. That investment will no doubt bear fruit too but in the meantime Indian Railways needs to launch some big projects. In this context, CMIE’s assessment that there haven’t been too many announcements for large projects in the last 12 months, except for the Delhi-Chennai high-speed venture and a couple of others, isn’t encouraging.
The other piece of bad news is that although revenues have risen 10% y-o-y,so far this year they’re about 8% below target.
This is one reason the operating ratio of 92.6% has stayed above the targetted 88.5% for the first five months. To be sure there’s no reason this can’t get better in the coming months if revenues pick up but there is a slowdown in the economy and even in good times the OR has not fallen below 90%.
As Ambit’s Nitin Bhasin points out while the long-term strategy for Indian Railways is well thought out with room for private sector participation, there is concern on the capacity of the ecosystem to award and execute $16 bn in the current year and $30 billion annually for the next four years thereafter. The sooner Indian Railways is able to rope in the private sector the better because it’s not going to be easy to try and do 500-600 kms of doubling every year through the railway PSUs or even electrify 2,000 kms a year. It must also get going on switching to commercial accounting; that will give the team a good idea of the returns on the investment and help it fob off political pressure for unviable projects.