Railway Budget 2015: Analysis

Suresh Prabhu’s maiden railway budget - presented yesterday - evoked contrasting responses from opposite sides of the political spectrum. Modi, expectedly, called it a “watershed budget” while the former railway ministers Nitish Kumar (1998-99, 2001-04) called it “A passenger-less train” & Dinesh Trivedi (2011-12) called it a “Statement of intended pipedreams” Both, however, had a word of praise for the Railway Minister calling him “efficient” & “brilliant” since Prabhu - as the power Minister in the Vajpayee govt. – has a reputation of being an effective reformist. The Economic Times was bang on when it chose to describe the budget as “Present Tense, Future Perfect”.

Indian Railways is the 4^th largest railway network in the world -1.14 lakh Kms long - carrying 21 million passengers daily & 1 billion tonnes of cargo per annum, with the support of 1.3 million employees. Obviously, if funded adequately, it can have a multiplier effect on the economy & create more jobs. It can ensure the well-being of future generations since it is more environment friendly; incidentally, annual consumption of fuel by the railways, is only 7% of the fuel used by the road sector.

Populism of the last 20 years, courtesy railways being handled, mostly, by an ally of the ruling party, has destroyed its financials, leaving it with a low investment surplus that led to the consequent congestion, overutilization & drop in safety standards. 

While previous budgets were low on vision & high on numbers, Prabhu’s budget was glaringly high only on vision; numbers with detailed timelines on project completion would have been more comforting. The Minister’s job is to get the railways back on track which he promised through 3 documents, 4 goals, 5 drivers & 11 thrust areas. Some of the important policy pronouncements follow:

Passenger fares unchanged:

Passenger fares - 25% of railway receipts - account for a loss of 26000cr per annum. While analysts demanded an increase in passenger fares, the opposition expected a fare reduction to account for the drop in fuel prices. What they failed to note is that the drop in fuel prices has been more than countenanced by an increase in electricity procurement costs at Rs 7/- per unit. The Minister has proposed a bidding process for buying power, henceforth, leading to a saving of Rs 3000 crores per annum. Prabhu, therefore, had reasons for not increasing passenger fares.

Last year, Indian Railways (IR) raised fares by 14.2% which led to a drop in passenger traffic by 4.6 crores - particularly in non-suburban non-PRS segment. Perhaps, some of the passengers have shifted to budget airlines or roadways. To entice passengers back, Prabhu has employed the two levers of improving customer service & enhancing the advance reservation period (ARP) from 60 to 120 days. In 2013 when ARP was reduced from 120 to 60 days, it led to an increase in the sales of budget airline advance bookings. The Minister, clearly, is trying to reverse the effect though the ostensible reason cited for the change in policy is to reduce the influence of touts

The Delhi electoral results & the impending Bihar elections by the end of the calendar year must have imposed additional political restrictions on the Minister. A rise in rates would have given the opposition another handle to beat the government, already under pressure of the land ordinance issue. The Minister therefore chose discretion against the valour of increasing rates. However, he has created some additional revenue streams which is welcome.

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Some additional measures announced by Prabhu to gain revenue: sweat assets by increasing confirmed seats in trains that run packed throughout the year by adding coaches from trains with lower occupancy levels; increase the no of coaches from 24 to 26 & add more general class coaches; & increase speeds from 110-130Kmph to 160-200Kmph to ensure faster turnaround. The shrewd Minister also realizes that while increasing the normal suburban tariffs is a political hot potato, charging more for A/C coaches & push-back seats added to these trains can help in gaining more revenue. He has quietly announced introduction of the same without talking of the attendant pricing.

Freight Tariff Increased:

66% of the rail receipts of 1.83 lakh crores flow through freight. Prabhu has increased the tariff for Iron ore & steel by 0.8%, coal by 6.3% & cement by 2.7%; the latter two could see a pass through to the consumer stroking inflation. The Iron & steel industry - plagued by weak demand & cheap imports - would absorb the rise. 

Dinesh Trivedi has argued that since IR accounts' for only 36% of the national freight traffic a strategy to gain share, by reducing tariffs, would have been more prudent. The Minister avers that it is more of slab rationalization & not necessarily a hike for only an additional Rs 4000 crores shall be generated through this measure. 

Some additional measures announces by the Minister to raise revenues: timetable for goods trains; increase loaded goods train speeds to 75 Kmph & empty freight trains to 100Kmph; & increase axle loads to 22.82 tonnes.

Other Initiatives

“Bullet trains” have been put on the backburner citing the likely receipt of the feasibility report only by the middle of the year; “semi bullet trains” at 20% higher speeds which can run on existing tracks, without an engine to haul them have been pushed, instead, which is welcome. Huge capital costs, perhaps, has been thus avoided. Obviously, he had no other option.

The Minister has secured 40000cr gross budgetary support but his plans for securing investments of 8.56 lakh crores during the next 5 years seems ambitious. Indian or foreign private sectors players invest basis expected returns, which an organization like IR, not in the pink of health, cannot promise. Reworking the concessionaire agreements is a solution but that shall be time consuming. Investments through SPVs with the states – sitting pretty on higher devolution of funds & coal auction proceeds – or with central ministries like Oil & Coal are more likely to fructify. Attempts to attract MPLAD funds would be only partially successful.

The Minister, faces an enviable task & is exploring all possible sources of revenue. He has offered stations & trains for corporate branding, proposed Railway display network in 2000 stations to unlock advertising revenue potential & offered development of stations on “as is where is” basis, to exploit the space and air rights on concession basis.. Setting up of a PSU, Transport Logistics Corporation of India (TRANSLOC), using surplus land & partaking in the logistics explosion in India, is a welcome initiative, through it shall bring IR in direct conflict with other govt. organizations like TCI & Gateway Rail. 

His plans to use automatic ticket vending machines with smart cards, billing through smartphones, outsourcing cleaning activities etc. shall help in reducing the manpower of the railways progressively adding to the long term health of the organization. IR's 1.3 million employees account for 35% of railway expenses & the 1.36 million pensioners - which 5 lakh more to be added during the next few years - account for an additional 18.6% of expenses, which makes this step extremely significant. He should bring IR's salary & pension expense to revenue ratio more in line with international practices.

Prabhu has tried to genuinely create a national movement for IR revival. He has involved various stakeholders NID, NIFT, IIT- BHU, and IIT- Kanpur etc. for specific programs. Simultaneously, the tech modernization campaign shall involve vendors like TCS, Infosys, Wipro & Zensar that have the expertise on transportation solutions, which they have successfully deployed at the clients end, abroad.

What did the Minister Miss out?

Critics have argued that the Minister would have been well served by corporatizing the organization which he did not. Perhaps he will, at a later date after he cleans up the account books & brings greater transparency.

Analysts expected the Minister to sell the surplus land holdings – a global practice – to fund infrastructure growth. The minister rightly stated that railway land is not properly demarcated & there are problems of encroachments. Since selling would lead to controversies, monetisation was apparently seen as a better route. Digitalization of land has, however, been taken up as a project.

The 12^th 5 year plan targeted an operating ratio of 75% while Dinesh Trivedi’s budget in 2011-12 planned a fig of 84%, both of which were belied. The fig of 88.5% suggested by Prabhu could be torpedoed by the 7^th Pay commission recommendations which shall entail an additional outgo.

Creation of a regulator & inviting private players to compete with IR on a common track - for which they pay user charges - could have transformed the ecosystem which he did not. Hiving of railway schools into Kendriya Vidyalayas, hospitals to the respective states - or create a central organization - & Railway protection force into the CISF could have helped IR to concentrate on its core business. Similarly, hiving off "Rail Neer" to compete with Coke's Kinley /Pepsi's Aquifina could have been another initiative. Creating a lean & mean organization concentrating on its prime business with a profit motive should be the aim. Non profitable routes insisted on by the states should be subsidized by the respective states.

Finally Railway budget is a relic of the British era which needs to be dispensed with; an entry in the finance budget indicating the budgetary support to IR would suffice.

Conclusion

Prabhu dream of transforming India through the railways is visionary but he shall be constrained by the challenge of executing the plans through the hard-nosed railway bureaucracy & successfully raising finance. Only “Prabhu” (Lord) can help Prabhu (Minister) succeed.