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Funds Crunch and the Railways

Beyond the political drama over the ouster of Dinesh Trivedi from the Ministry of Railways, it is clear that the railways are in desperate need of funds. The Railways Budget for 2012-13 tried to address the issue.

COMMENTARY

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The railways being a state-managed

Funds Crunch and the Railways

public service, the tariffs are not fi xed to recover much more than the cost. The organisation operates, after considering S Ananthanarayanan the need for replacements, very close to

Beyond the political drama over the ouster of Dinesh Trivedi from the Ministry of Railways, it is clear that the railways are in desperate need of funds. The Railways Budget for 2012-13 tried to address the issue.

S Ananthanarayanan (anarayanan@gmail.com) is a former financial adviser and chief accounts officer, Western Railways, Mumbai.

T
he Railway Budget this year will be remembered for the drama over the forcing out of Dinesh Trivedi from his post by Trinamool Congress chief Mamata Banerjee. By the time this article appears in print, the United Progressive Alliance government may have stood its ground or there may have been a rolling back of the fare increases. But politics and diplomacy apart, the features of the budget presented and the issues involved merit discussion and assessment – assessment of why the increases were necessary and whether they are adequate.

Railway Budget

The railway budget process is basically one of planning finances and laying down a road map of action. Briefl y, the coming year’s revenue and expenditure are estimated with the help of the previous year’s figures and the likely increase in traffic and prices. Surplus revenue, if any, goes towards funding, first, the replacement of worn assets (mainly track and rolling stock) and then improvements and additions. Creation of new assets is partly from this source and partly from support, as a “loan in perpetuity” from the central government.

march 31, 2012

the break-even point. The nature of the industry is that there are large fi xed costs and the level of traffic at the breakeven point has a huge leverage over the level of surplus. That is to say, as the existing level of traffic just balances both the large fixed cost and the smaller variable element, any increase in volume would proportionately affect only the smaller element of cost but add substantially to the bottom line. Till a few years ago, there were no large increases in traffic and rising costs eroded railway surpluses. Reluctant support from the central government pushed the railways to raise loans, which cost more and with stagnant traffic levels there were fears of a “debt trap”. There was even an impression that it was the burden of operating costs and paying dividends on the cost of “politically motivated” projects that were the root of the railways’ ills. And every year there was an inevitable increase in tariffs, the passenger being treated a little more gently.

Crisis

But the boom years of the national economy at the turn of the century, till 2007-08, changed things and brought in traffic like the railways had never

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COMMENTARY

handled before. The “high leverage” effect of this “high fixed cost industry” was switched on and the railways booked record surpluses. With rising traffi c, the railways presented some sort of a “miracle” – of expanding services without an increase in rates, particularly passenger fares. And with a rising surplus, the railways shifted gears to higher expen diture levels. The central government also chipped in to raise costs with the award of the pay commissions. And in 2008-09, there was the worldwide slump, which hit the railways hard. The year 2010-11 spoke loud and clear that there had been no miracle and the railways had to re-examine its policies and think of adjusting passenger fares at any rate to refl ect costs.

During the boom years, with the support of rising traffi c, the railway ministry seems to have been enthused to do even more and projected a record-breaking surplus and thereby proposed giant investment plans. The boom was over by 2009, but the window dressing continued and 2010-11 was also presented as a model year. But halfway through the year, all the signs were that the level of estimated traffic would not be met and that it was time to trim the spending sails and be realistic about rates. But despite progress during the year being slower than expected, the ministry was perhaps driven to ignore reality and traffic was projected again to grow to 993 million tonnes, expenditure estimates were kept low and the investment programme for the coming year was sanctioned at Rs 57,630 crore, which was higher than the previous year’s level.

2011-12 Developments

It is to the credit of the current team in the ministry that it has recognised that there was a crisis and this moved the government to act in ways that were feasible. For staying at least respectably within the revised estimates for 2011-12 it would have been unavoidable to postpone all kinds of legitimate expenditure of the year to the next fiscal. All these costs being booked by April/May 2011, the new financial year would have seen a dangerous erosion within the fi rst

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quarter. While taking measures to curtail avoidable revenue expenditure, the Railway Board has trimmed the works budget too. Early in the year, the Rs 57,630 crore works budget was reassessed and reduced by Rs 9,179 crore to Rs 48,551 crore, a fi gure nearly retained in the revised estimates. The state of affairs of balances in revenue-fed funds was precarious and in the course of the year, a Rs 3,000 crore loan had to be taken from the general revenues. The trend of passenger and goods traffi c has been reviewed and in the 2011-12 RE, passenger earnings have been reduced by Rs 1,544 crore and the originating goods traffic was reduced from 993 million tonnes to 970 million tonnes (but earnings remained unchanged).

Whether these projected levels for 2011-12 are realistic will be known by May end, when the accounts for the year are finalised. But the great departure this time around is that for 2012-13 the budget proposes an increase in rates which include passenger fares. The earnings are projected to increase by Rs 28,600 crore, which is over 25%, with the rise in expenditure at less than half that fi gure. While rates have been increased, loading is taken as 55 million tonnes more, with a 5.7% growth in passenger traffi c. Both figures are feasible. The provision for replacements, at Rs 9,500 crore (which is before the surplus), in any case would be available. Insofar as an improvement in finances, yes, this small step is progress all right, whatever be the storms that it has produced in the political arena.

But more important than the numbers is the fact that the government has chosen to act, for once rationally and responsibly. There can be consideration for the passenger and, yes, politics is a reality. But to keep passenger fares unchanged for a decade, while all costs have multiplied is not just ridiculous, it is disregard for any obligation of governance and amounts to a nationwide case of “cash for votes”. This, of course, is really no cash at all, because everybody pays, anyway. One could say that travel subsidy is an option of the government and, yes, the government is legally competent to make rail travel gratis. But

vol xlvii no 13

such thinking flies in the face of equity and all ideas of the railways being partly commercial, to fund at least its bare functioning. One of the fi rst casualties of a money crunch is in the large area of replacements. To allow the railways to manage with less income is to invite a fall in standards, particularly of safety. Having said that, let us take a look at the actual revisions proposed (Table 1).

Table 1: Item-wise Increase in Budgeted Revenue

Heads 2011-12 2012-13 Increase (in %) (Estimated) (Projected)

(Rs in crore)

Passenger 28,800 36,073 7,273 25.25

Goods 68,620 89,339 20,719 30.19

Other coaching 2,750 2,994 244 8.87

Sundry 3,700 4,096 396 10.70

Total 1,03,870 1,32,502 28,632 25.34

The Budget Proposals

Although there are protests about the increases in passenger fares, we can see that the major increase is actually under goods earnings. It would be instructive to see how these increases are distributed within passenger and goods earnings.

Table 2 (p 14) shows that a whole 50% of the increase of Rs 20,700 crore under goods is from coal traffic alone. The rest is almost equally shared by steel, cement, foodgrain, fertilisers, petroleum and container services. Against this levy on goods traffic is the increase of about a third, Rs 7,173 crore under passenger traffic. The bulk, Rs 5,500, or 77% of the increase is under second class, nonsuburban, which is a little higher, as a percentage than the weightage of this portion, which is 71.29% of passenger traffic. Although the increase in the rate per kilometre is 6 paise, against an increase in the upper classes, non-suburban, of 17 paise per kilometre, as a percentage increase it is 21.62% in the case of second class, non-suburban (against 15.66% for the upper classes).

In the case of suburban traffi c, the increase is just 1 paise per kilometre. This increase, in a segment which is only 6.6% of passenger traffic, accounts for Rs 255 crore of increased revenue. It is ironic that under upper class, sub urban, there is actually a reduction of the fare – a fact that appears to have missed the attention of many hard critics of the

COMMENTARY

budget! Why did the railways ministry and the government include this minor, but sensitive, item of increase of Rs 255 crore in the scheme for raising Rs 28,000 crore is certainly a question. The only answer appears to be that the government felt they had to bring the spotlight on the need to raise fares, and leaving any sector unscathed would have devalued the compulsion the government wished to convey.

The whole exercise was thus meant to raise Rs 7,173 crore, an increase of 19%, 20% or 21% in the overall, non-suburban or second class, non-suburban sector, respectively, after no increase in a decade, when such increase in a single year has been commonplace. And with this hesitant increase of passenger fares, the funds crunch demanded a larger increase under the freight segment.

The increases under the goods segment, which is proposed to yield Rs 20,720 crore, result in an overall rise of the per kilometre rate by 23.13%, with the increase for coal traffic being 28%. Unlike passenger traffic, goods traffic has not been protected all these years – there have been increases in rates and in recent times, coal traffic has bled with the increased minimum weight for charge at eight tonnes above the marked carrying capacity of wagons. In this context, the increase in rates is serious indeed. We can see that the sectors (steel, cement, foodgrain, fertiliser, POL and container services) that will bear the bulk of the burden will affect all market costs and the rail passenger, who is sought to be protected, may end up paying the full fare after all.

Comparative Costs

This brings one to the question of the subsidy that goods traffic has been providing to passenger traffic, for years. For considerations more of politics than humanity, the rising cost burden of the railways has been laid every year on the goods tariff. Over a period of many years, the cost of travel to passengers has been about 26 paise per kilometre. In comparison, the freight cost of one tonne kilometre has risen from 71 paise in 1998-99 to 107 paise in 2011-12. The ratio of the rate per passenger km to that per tonne km has been falling from

0.30 in 1998-99 to 0.25 in 2011-12. The world over this ratio is above 0.85 and in Europe it is as high as 1.30. While population levels and other reasons like the quality of passenger service do affect this kind of a ratio, what an extreme ratio brings out sharply is the extent of the cross subsidy in railway traffi c. If there are compulsions to keep passenger fares low, is it right that the cost be borne within the railways, which only incidentally also provides freight service? Are passenger services not more demanding, in terminal facilities and path for movement at higher speeds? As high freight rates affect other industries, is it fair and equitable? Is there transparency in such governance?

The freight rates in India, on purchasing power parity, are perhaps the highest in the world and surely affect the competitiveness of exports. Quite apart from the need of first aid for the railway’s finances, the rail ministry – once it had the government listening and agreeing to act – should have advised the government of the need to rationalise

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Table 2: Item-wise Increase in Budgeted Revenue 2011-12 2012-13 Increase in No of Passengers Earnings (Rs) No of Passengers Earnings (Rs) No of Passengers Earnings (Rs) Million P/Km Crore P/Km Million P/Km Crore P/Km Million P/Km Crore P/Km (%) Suburban passenger Upper class 254 9,180 266 0.29 270 9,818 279 0.28 16 638 13 -1.93 Lower class 4,105 1,34,151 1,719 0.13 5,459 1,43,474 1,974 0.14 1,354 9,323 255 7.37 Total 4,359 1,43,331 1,985 0.14 5,729 1,53,292 2,253 0.15 1,370 9,961 268 6.13 Non-sub passenger Upper class 91 61,074 6,698 1.10 95 63,880 8,103 1.27 4 2,806 1,405 15.66 Lower class 3,841 8,60,602 20,217 0.23 4,017 9,00,114 25,717 0.29 176 39,512 5,500 21.62 Total 3,932 9,21,676 26,915 0.29 4,112 9,63,994 33,820 0.35 180 42,318 6,905 20.14 Grand total – passenger 8,291 10,65,007 28,900 0.27 8,741 11,17,286 36,073 0.32 450 52,279 7,173 18.98 2011-12 2012-13 Increase in Originating Tonnes Earnings (Rs) Originating Tonnes Earnings (Rs) Originating Tonnes Earnings (Rs) Million NTKM Crore TKM Million NTKM Crore TKM Million NTKM Crore TKM (%) Goods Coal 454 265,965 27,867 1.05 485 284,438 38,168 1.34 31 18,473 10,301 28.07 Raw material for steel plant 15 10,877 1,172 1.08 15 11,361 1,566 1.38 0 484 394 27.93 Steel 34 33,751 3,957 1.17 37 36,050 5,379 1.49 3 2,299 1,422 27.27 Iron Ore 105 40,666 7,375 1.81 104 37,360 7,022 1.88 -1 -3,306 -353 3.64 Cement 109 61,495 6,558 1.07 118 67,496 9,039 1.34 9 6,001 2,481 25.58 Foodgrains 46 55,136 4,515 0.82 50 59,302 6,250 1.05 4 4,166 1,735 28.70 Fertiliser 50 43,818 3,970 0.91 52 45,552 5,198 1.14 2 1,734 1,228 25.95 POL 42 26,483 3,660 1.38 42 26,880 4,741 1.76 0 397 1,081 27.62 Container service 38 44,445 3,357 0.76 42 48,300 3,622 0.75 4 3,855 265 -0.72 Other goods 77 59,290 5,188 0.88 80 62,000 6,854 1.11 3 2,710 1,666 26.34 Misc goods 1,000 1,500 0 500 Total 970 6,41,926 68,619 1.07 1,025 6,78,739 89,339 1.32 55 36,813 20,720 23.13 Table 3: Passenger Freight Ratio Year 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2112-13 Originating loading (million tonnes) 421 456 473 492 519 557 602 667 728 794 833 888 922 970 1,025 NTKM (millions) 2,81,513 3,05,201 3,12,371 3,33,228 3,53,194 3,81,241 4,07,398 4,39,596 4,80,993 5,21,372 5,51,448 6,00,548 6,25,723 6,41,926 6,78,819 Goods earnings (Rs crore) 19,960 22,061 23,305 24,645 26,505 27,618 30,778 36,287 41,716 47,435 53,433 58,502 62,845 68,620 89,339 Earning per NTKM (Rs) 0.71 0.72 0.75 0.74 0.75 0.72 0.76 0.83 0.87 0.91 0.97 0.97 1.00 1.07 1.32 Originating passengers (millions) 4,468 4,641 4,840 5,169 5,048 5,203 5,475 5,832 6,334 6,536 7,047 7,383 7,809 8,291 8,741 Passenger KM (millions) 4,04,605 4,31,395 4,57,680 4,94,201 5,15,772 5,42,052 5,75,608 6,16,632 6,95,821 7,71,070 8,39,203 9,04,761 9,80,131 10,65,007 11,17,289 Passenger earnings (Rs crore) 8,550 9,581 10,515 11,196 12,575 13,299 14,113 15,126 17,225 19,844 21,931 23,488 25,793 28,800 36,073 Earning per passenger Km (Rs) 0.21 0.22 0.23 0.23 0.24 0.25 0.25 0.25 0.25 0.26 0.26 0.26 0.26 0.27 0.32 Ratio: Earning per Pass KM/ Earning per NTKM 0.30 0.31 0.31 0.31 0.32 0.34 0.32 0.30 0.29 0.28 0.27 0.27 0.26 0.25 0.25

and should have developed a scheme to improve the passenger km-tonne km ratio. Instead, Table 3 shows that the ratio, even in 2012-13, remains 0.25, the lowest so far.

Safety

Apart from rationalising fares and freight charges and also covering all costs, the railways need to provide for replacements and renewals. The bold proposal to provide Rs 9,500 crore under the Development Reserve Fund is heartening. It would be doubly so if it were achieved and then if funds to that extent could be deployed in work. The

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Sam Pitroda Committee filed its report that the railways need Rs 1 lakh crore to catch up with safety-related arrears. That report requires study and a plan to squarely address the concerns generated. The figure itself may be infl ated, unaided by spot inspection which would reveal many cases where even old bridges are in good condition or where less expensive repairs could assure safety. The railways have a system of regular inspection, record keeping and programmed replacements, but the difficulty in the area of bridges has been in carrying out work. If some miracle were to provide the Rs 1 lakh crore that

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Pitroda has assessed, it may take 50 years to spend it.

Succeeding budgets should build on the start made by the present team and play the game straight – services should be priced at cost and where subsidies are required, they should be accounted for and transparently provided. Preventive maintenance and replacements cannot be postponed and funding has to be arranged in time and the tariff should reflect the finance cost. The large size of the undertaking can cover its defi ciencies for a long time, but recovery may be impossible and the implications disastrous, if the industry is allowed to go sick.

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