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A Bold Railway Budget

Suresh Prabhu has made it clear that he is ready to bring a turnaround in the railways by seeking investments for its modernisation and expansion plan.

Policy Pulse
Publish Date: Mar 8 2016 5:25PM | Updated Date: Mar 9 2016 12:18PM

A Bold Railway Budgetphoto: Hrishikesh bhatt

 Some politicians may term the rail budget as a feckless show, but Railway Minister Suresh Prabhu has made it clear that he is ready to bring a turnaround in the railways by seeking investments for its modernisation and expansion plan. It is in this respect that the former Member (Traffic), Railway Board, Shri Prakash finds the rail budget bold and path breaking

 
In spite of the current financial crisis, which may aggravate further, due to impending wage increase burden, on account of 7th Pay Commission Award, the Railway Minister went ahead with his quest for augmenting the capacity of Indian Railways for the second successive year. Last year, he had announced an investment plan of over Rs 8.5 lakh crores for the next five years. The annual plan, 2015-16, saw a phenomenal increase of about 70 percent over the previous year – from 58719 crores to 100011 crores. Continued emphasis on increase in investments by over 21 percent estimating 1.21 lakh crores mainly for construction of new lines, doubling and gauge conversion is a welcome step.
 
‘Indian Railways has suffered from the absence of a comprehensive framework for capacity expansion over the last 60 years’ concludes the National Transport Development Policy Committee (NTDPC), an expert committee, appointed by the previous Government. In its report submitted in early 2014, the Committee recommends massive capacity expansion in Indian Railways by increasing the investment from 0.4 percent of GDP to 0.8 percent in the 12th Plan and 1.1 percent in the 13th Plan. A mix of public and private investments, innovative schemes to attract private investments for infrastructure expansion, involving State governments for sharing the cost of new lines, borrowing from financial institutions, like the LIC, for bankable infrastructure projects, would certainly enable Indian Railways to meet the rising demand of both passenger and freight transport.
 
Simultaneously, Indian Railways would have to enhance its project execution capability, which is currently inadequate to absorb increased investments. It would also have to focus on speedy completion of infrastructure projects, which generally suffer from time and cost overruns. Dedicated Freight Corridor Project that started in 2006, and was initially to be completed by 2012, is now targeted for 2019, which amounts to a delay of seven years if the revised target is adhered to.
 
Although the Railway Budget does not indicate how the annual plan of 1.21 lakh crores for the next financial year is going to be financed, it is not hard to guess that most of it would be from extra-budgetary support that is commercial borrowing and private investments. The capability of Indian Railways for internal generation has declined substantially over last few years with rising costs and reduced earnings. Because of reduced internal generation, contributions to depreciation reserve fund and development fund have also reduced. This will impact the maintenance and replacement of the rolling stock and other assets, which is not desirable in the long run. Even increased dependence on commercial borrowing and extra budgetary resources is not sustainable unless the investment is employed in the projects that are financially viable.
 
The Railway Budget suggests measures for cutting down expenditure, which are mainly based on the reduced expenditure on fuel, in the hope that diesel price and electricity rates will continue to decline, which may not come true. Indian Railways generally spends about 25 percent of its ordinary working expenditure on fuel. Also, enhanced wage bill and pension outgoes as a result of over 24 percent increase on account of the 7th Pay Commission may further cripple Indian Railways financially for the next three years as earlier experiences of the 5th and the 6th Pay Commission awards indicate. Therefore, there is an urgent need for Indian railways to increase its earnings from both passenger and freight business.
 
Realising the need for increased freight earnings the Railway Minister has emphasised on the increasing the share of the railways in freight transport by enlarging the commodity basket, rationalising and incentivising the freight tariff structure and improving traffic operations. The share of railways that has been stagnant at about 36 percent for last few years may decline to 23 percent in ‘business as usual’ scenario by 2032, according to a study conducted by TERI. India’s intended nationally determined contributions (INDCs), included increasing railways’ market share in freight transport as a major action programme for reduction in GHG emissions. Apart from the measures for attracting more freight business to railways from road, Indian Railways should also increase its capability to carry more passengers. The current policy of not introducing new passenger trains and keeping it to a bare minimum is not a sound strategy particularly on those sectors where passenger demand is still not met.
 
 Another notable feature of this year’s Railway Budget is increased investment in urban transport projects. Railways have been hesitant to make investments in urban transport projects as these have been largely loss-making even as they are immensely desirable from the social and environmental points of views. In fact, Railways withdrew voluntarily in late eighties from metro railway projects after investing in the first metro rail project in Kolkata, which was commissioned in 1984. The Railway Budget provides for not only expansion of suburban railways in Mumbai and Metro Rail in Kolkata but also talks about developing regional rail transport in other major cities like Ahmedabad, Bengaluru, Hyderabad, Chennai and Thiruvananthapuram in partnership with State governments.
 
 In the previous budget, Railway Minister initiated proposals for restructuring of Railway Board and setting up of a rail regulator. In this Rail Budget he has proposed to reorganise Railway Board on functional lines and suitably empower the Chairman, Railway Board, to lead the organisation effectively. At present, Railway Board performs both policy making and executive functions and is organised on departmental lines, namely transportation, mechanical and electrical, or civil engineering, etc. Even as the restructuring of Railway Board, which has remained largely unchanged for a very long time, has been advocated by many experts, the officers and industrial unions, who have a great stake in its efficient working, should be taken into confidence before the initiation of large-scale structural changes.
 
The Railway Minister has also proposed to bring a bill for setting up Rail Development Authority, a regulatory body, to enable fair pricing of services, promote competition, protect customer interests and determine efficiency standards. This is again a welcome initiative that would instil confidence in private investors and would also help the Indian Railways to bring an attitudinal change towards a customer friendly approach.
 
Another path-breaking step taken by Indian Railways in the Budget is to initiate a number of steps to encourage research and development of indigenous rail technologies by setting up a new R&D organisation. A Special Railway Establishment for Strategic Technology and Holistic Advancement, SRESTHA will be established and National Academy of Indian Railways will be upgraded as a full-fledged University, and most importantly, railway chairs will be set up to promote research in key policy areas in the established universities and research institutes.
 
Unlike in previous budgets, this Railway Budget does not provide a detailed review of physical and fiscal performance for the current financial year. It is inexplicable as to why this long-standing practice has been given up. The Budget is more like a policy statement, albeit a very bold one, in view of current financial situation of Indian Railways. It would be a great challenge for the Railway Minister to bring the investments from external sources and to steer clear Indian Railways from the current financial crisis during the remaining three years of the present Government.

-- Shri Prakash is a former Member (Traffic), Railway Board. He is currently a Distinguished Fellow in TERI.