Railway Modernization and Rail Budget 2015-2016 Analysis

  • by Gaurav Bansal

Issues concerning rail infrastructure in India :

  1. Low Operating Ratio: Railways spend 94 paise out of every rupee it earns on operating expenses like maintenance and staff salary. This leaves very little investible surplus. A part of this surplus is used to renew the depreciated inventory like worn out coaches or repair work at old stations. The lack of investment in rail infrastructure is partly responsible for poor service delivery and lack of passenger safety.
  2. Cross Subsidization: To keep the cost of passenger fares low, railways has increased the cost of freight(goods transport). This makes railways uncompetitive when it comes to transporting goods. Most manufacturers, therefore, prefer to rely on roads network for transporting goods. This has an added disadvantage of environmental pollution as vehicles have a larger carbon footprint than relatively cleaner railways.
  3. Lack of an Independent Rail Tariff Authority: It is politically infeasible to raise the passenger fare since a large number of regular commuters would not welcome any hike in the fare. It is essential that an independent authority determine the passenger fare and link it to the cost of transport in a transparent manner. However, this authority is yet to see the light of day. Such an authority needs to be set up via an act of the parliament.
  4. Lack of Professional Management: Railways is run like a government department instead of a profit-making, competitive business. Government announces many populist measures like new rails on lines with low traffic even though these lines are not profitable. Similarly rail museums do not generate significant revenues for the government. Data released as part of the rail budget indicates railways outgo on net social service obligation in the current financial year (2014-15) stood at Rs 25,912 crore. Net social service obligation refers to the loss encountered by railways due to underpricing of services for achieving certain social objectives.
  5. Failure to attract FDI in Key Projects: 100% FDI is allowed through automatic route in railway infrastructure, high speed rail system and dedicated freight corridor. FDI attracted in 2013 fiscal was barely 3000 crore against an investment target of 50,000 crore rupees.

How the rail budget 2015-2016 fares against these challenges:

  1. No new trains or extension services were announced. This is a welcome departure from the past practices since the saved resources can be used to complete the unfinished projects.
  2. The rail budget did contain some populist moves like no hike in passenger fare. To compensate for it,however, rates for most kind of freight have been raised. (0.8% for LPG, kerosene, 0.8% for iron & steel; 2.7% for cement, 10% for urea and 6.3% for coal). This measure is expected to rope in additional 4000 crore rupees. However, this might be problematic since the railways faces fierce competition in freight transport and holds only 31% of share in this sector. Raised tariff rates might make it lose more share to the road sector and the earnings might drop instead of increasing. Also, the rise in freight rates will ultimately be passed on to consumers leading to inflation. Thus, cross-subsidisation continues in this budget.
  3. 77 works of doubling and tripling 9,400 km of route for freight had been sanctioned, yet there is no timeline for completion of these works. It is entirely possible that the unfinished works get pushed into the next fiscal. This will merely enlarge the long list of unfinished projects.
  4. 917 road under-bridges and over-bridges to be constructed to replace 3,438 railway crossings at a cost of Rs. 6,581 crore. Surveillance cameras will be installed in select coaches and ladies compartments for women’s safety without compromising on privacy. These measures indicate that railways is concerned about safety of the commuters.
  5. Many new measures have been introduced to improve customer satisfaction such as Wi-Fi in more stations, mobile phone charging facilities in all train compartments,facility of online booking of wheelchair for senior citizens and ‘Operation 5 mins’, wherein passengers traveling unreserved can purchase a ticket in 5 minutes. Such passenger-friendly measures have been introduced regularly in rail budgets over the last decade but their implementation on ground level has not always been satisfactory.
  6. Innovation specially through the use of ICT Services has been a hallmark of this rail budget. Investments would be made in fundamental and applied research for seeking solutions to rail-specific issues. Novel solutions like vacuum toilets have the potential to cut costs for Indian railways and make it more eco-friendly.
  7. Plan outlay (the money that is proposed to be invested in unfinished, newly announced projects for the current financial year as opposed to the day-to-day expenses) for 2015-2016 has been raised steeply to  Rs 1,11,000 crores. A bulk of this investment will be aimed at doubling and tripling existing tracks, along with gauge conversion(from meter/narrow gauge to broad gauge) to increase the railways’ loading capacity While this shows railway’s commitment to provide resources to augment the railways capacity, how the funds would be raised is a matter of concern.
  8. The central government will contribute about Rs 40,000 crore through the general budget, while internal resources of the railways itself will account for Rs 17,793 crore. Rest of the money has to be raised through means like tapping pension and insurance funds, setting up a holding company or a joint venture with existing non-banking financial companies such as the Indian Railway Finance Corporation. Debt could be raised from foreign sources like the World Bank and the Asian Development Bank.The rate at which these borrowings will be obtained is unclear. A high interest rate may become detrimental to rail finances and catch the railways in a debt trap.
  9. The 2015-16 Railway Budget document shows funds through the PPP mode are expected to increase by only Rs 60 crore to Rs 5,781 crore. This implies that railways is relying less and less on PPP mode of investment since it has realised that attracting private investment through this mode is unfeasible for most projects that are not financially attractive. This is a welcome step since no huge targets are set for PPp investment which are difficult to realize after the budget is announced.
  10. New models of revenue generation have been proposed in the rail budget.Branding stations and trains could potentially take the railways’ ad revenue to Rs 2,000-Rs 3,000 crore.
  11. The Rs. 8.56 lakh crore investment planned in the next 5 years can provide a major stimulus package to the private sector. For example, the redevelopment of railway stations is good news for construction companies such as L&T which can bid for the projects in the public-private partnership (PPP) basis.
  12. Some reforms in the organizational structure have also been announced. The railway board will focus exclusively on policy formulation and implementation will be hived off to another body. A project monitoring group will attempt to provide faster clearance to projects. This is expected to boost investor confidence.
  13. A provision of Rs 100 crore has been made in this Budget for High Speed Rail Project (HSR) as an initial grant towards Rail Vikas Nigam Ltd (RVNL) . Two pet projects of the rail ministry(diamond quadrilateral and bullet trains) are still in the ‘feasibility study’ stage. No timeline exists even for commencement of work.
  14. Special focus has been put on improving connectivity and removing bottlenecks in the transport sector by linking rail infrastructure with other sectors like ports and coal.  As a priority, Indian Railways will improve port connectivity through PPP mode of funding in tandem with Sagar Mala Project of Port Development. Railways will also speed up construction of critical coal connectivity lines to facilitate faster transportation of coal.
  15. For the first time, a five year action plan and vision 2030 document have been presented along with the budget. This provides a medium to long term perspective in rail budgeting. Targets achieved each year can be matched against the original targets to assess the progress in key projects.

Thus the budget largely avoids populist measures and is realistic and more pragmatic than the previous one. How successfully the railways raises resources and how successfully it removes the implementation bottlenecks will determine the budget’s success.


Gaurav Bansal