The Telegraph
Since 1st March, 1999
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The author is retired financial adviser, ministry of railways

Another railway budget is being presented under the shadow of dwindling resources and a number of serious railway accidents. It is likely to be as predictable as ever, both in form and substance. Financial problems will be highlighted without detailing the measures taken to tackle them; decline in revenues will be attributed to the sluggish growth of the economy rather than the lack of aggressive marketing; cost inputs will be shown as rising steadily without any solutions being offered; and the gap between income and expenditure will be bridged by raising fare for passengers and freight, the amount depending on impending elections. The operating ratio, or the money spent to earn one hundred rupees, was 98.3 per cent in 2001-02, which means that the Indian Railways is about to go in the red, and yet the accounts will show marginal profits.

But truth ultimately has to prevail. The railway system is the lifeline of the economy, and also binds us into a unified nation. If it is allowed to decay, the country and the economy are also bound to degenerate.

At this critical juncture in the 150 year-long existence of Indian Railways, what is required is not the usual tinkering, but a sledgehammer blow, a series of strong measures to take it out of the abyss. The draft approach paper to the tenth plan notes that “considering India’s continental size, geography and resource endowment, the Railways should have a leading role in the transport sector — not to mention other considerations such as greater energy efficiency, eco-friendliness and relative safety. However, Indian Railways has experienced a continuous decline in its position relative to road transport system. This has happened primarily because of policy distortions which need to be corrected urgently.” But such distortions can be corrected only by government action backed by political will.

The time has definitely come to define the character of the Indian Railways — is it a government department or a commercial enterprise' Currently, it professes to be the latter, but functions like the former, resulting in a lack of clarity of purpose. If it works within the constraints, social obligations and regulation of the government, it cannot be financially self-sufficient. Railway projects are generally undertaken not for reasons of profit, but to satisfy various political demands. It was carried to an extreme when the railways minister, in last year’s budget speech, even laid down a formula to distribute available funds to the different states “fairly”. Numerous committees have stressed on the need for structural changes to make the railways a truly commercial enterprise, albeit one owned by the government, but no action has been taken on this front.

This dichotomy leads to many financial anomalies. The railways has certain social obligations, which are quantified in the annual budgets. From about Rs 2,800 crores in 1993-94, these subsidies have risen to Rs 5,120 crores in 2000-01. These are used for running uneconomic branch lines, suburban services, welfare activities like hospitals and schools for staff, security, and so on. But, as the draft approach paper says, “the most important policy distortion is the skewed tariff policy which overcharges freight movement in order to subsidize ordinary passenger traffic. This is accompanied by an investment strategy which has placed excessive emphasis on opening new lines for passenger traffic and not enough emphasis on expanding capacity in areas where there is potential for commercial traffic.”

The quantum of this subsidy is obviously never calculated, but one index has it that over the last eight years, the cost of input for passenger transport had risen by 15 per cent while the passenger fare had gone up by 9 per cent only. But ironically, the capacity of passengers to pay higher fares is also reaching saturation point, and so hiking fares is not an easy option.

There are two other remedies. First, with the improvement and building of many roads like the “Golden Quadrilateral”, the railways should concentrate on long-distance and intercity passenger traffic, leaving everything else to road traffic. In other words, instead of proudly announcing the introduction of new trains where traffic is less, the budget should also contain a list of unprofitable passenger trains and uneconomic branch lines withdrawn from service.

Second, if the government wants the railways to continue with its social obligations, it should make good the loss. In the German, Swiss and French Railways, for example, subsidies range from 31 to 68 per cent of total revenues, but the governments make good such financial loss. But in India, the budgetary support to the railway has been steadily declining from 75 per cent of the plan expenditure in the seventh plan to 15 per cent in the eight plan, to a single-digit figure in the tenth plan.

This is the reason for the “skewed tariff policy”, the railways’ gradually outpricing itself, and even traditional customers like the Tata Iron and Steel Company switching over to road transport. The days are not far, particularly in a globalized economy, when an importer in Mumbai will find it cheaper to get steel from Germany than to bring it from Tatanagar.

The railway budget does not give an analysis of how much of bulk traffic was lost to road transport because of increased tariff and delayed delivery. But, the railways has lost market share in freight from 89 per cent in 1950-51 to 40 per cent in 1999, and from 80 per cent in passenger traffic in 1950-51 to 20 per cent in 1999, though traffic has grown manifold in absolute terms. After the completion of the “Golden Quadrilateral” measuring 13,952 kilometres of roads by 2007, the market share will go down even more drastically.

Red tape has also prevented a differentiation between the core and peripheral functions of the railways. There had been half-hearted attempts to involve the private sector through “own your wagon” or “build, own, lease and transfer” schemes, but there have been no serious attempts to privatize non-core activities. Privatization of areas like catering, the manufacture of coaches and engines, repair and maintenance, operation of the Calcutta Metro and private trains like the Palace on Wheels, or Container Corporation of India trains, will not only save expenses but will add substantially to revenues.

The European Commission and the World Trade Organization are making enquiries for investment opportunities in Indian Railways, of course, with usual guarantees, but the response is too muted. In fact, the railways would do well to have a wing of the disinvestment ministry in the railway board to examine which areas can be offloaded.

Another area which can be tapped for resources are the enormous real estate which the railways holds all over India. It has been estimated that if the railways were to lease out 25,000 acres of land for 10 years, it could generate as much as Rs 263,000 crores.

At the same time, the railways should remember that a rupee saved is a rupee earned. But one of the ways in which money can be saved — by cutting excess staff, which leads to increasing administrative costs — has not been touched upon at all, in spite of the draft approach paper’s emphasis on it. The railways’ staff strength in 2000-01 was 1,545,300, less than that of the previous year, but the staff cost had risen by 15.7 per cent, to touch Rs 18,841 crores. The average wage of an employee has risen by 17.8 per cent, to become Rs 121,281 per year. Add to this the ever-increasing pension payments, and the staff cost alone accounts for 56 per cent of gross receipts. After meeting the other working expenses, precious little is left for development. The draft approach paper wants the railways to stabilize around 12 lakh employees, accounting for 45 per cent of gross receipts. This will not only lead to savings, but it will also improve productivity, but there will be no mention of this in the budget.

Another way to save costs is by analysing the cost and time overrun of projects costing Rs 10 crore or more, prioritization of projects that are likely to yield revenues, rather than populist ones. Only those projects should be undertaken which lead to capacity augmentation of high-density corridors.

The list of issues, which required policy initiative and political will, is almost endless. But the railways seems to be totally lacking in any serious initiative to garner resources. It has to find another Rs 5,800 crore for the development plan this year, and Rs 270,000 crore by 2010. But this is sure to be a distant dream; the railway budget will continue to be all gloss and pomp, with no substance and character.

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