The Hindu Business Line : Railway Budget 2007-08 — On track to fuel growth, de-rail inflation

The Rail Budget is well-focussed on the need to contain inflation, equip the system for future growth and make it comparable to any other in the world. While the freight sector initiative and the investment strategy appear to be in the right direction, the fare cut across the board may be a source for concern, says VIJAYALAKSHMI VISWANATHAN.

The thrust of the Railway Budget for 2007-08 appears to be an extension of the strategy of volumes to the passenger segment, despite the healthy growth of passenger earnings by 14 per cent. It is also presumably an attempt to curb the inflationary tendency through an across-the-board cut in passenger fares for all classes and by reducing the freight rates of diesel and petrol by 5 per cent and iron ore by 6 per cent.

While there is some justification for reducing AC First class fares to meet the competition from low-cost airlines, the necessity to cut the fares of AC Second and AC Third class is not apparent. The Railways announced a scheme of upgradation in the last Budget to overcome the problem of vacant berths, the result which would probably offer some clue to the rationale for this move. In his reaction, an official of one of the airlines said this cut would not affect their business as the time advantage is still with them on long distances.

Passenger fares

Second class fares have been lowered by a rupee and sleeper fares by 4 per cent. In many sections, the rail fare is lower than the bus fares. As it is, the Rilaways makes loss on passenger services of Rs 7,779 crore on non-suburban sectors. Unlike the West, where losses on account of social service obligations are compensated, the Indian Railways does not get any support from the Exchequer. So a decision to cut fares can be justified only if a costing exercise reveals that with the increased carrying capacity, the revenue receipts will meet the cost of operation or reduce the losses.

Freight segment

In the freight segment, with the spurt in incremental loading, the Railways should have gone in for measures that would have resulted in greater share of rail co-efficient and attracted high rated commodities and petroleum products. This is particularly important as the loading figures up to end of December, though higher in absolute terms, do not add comfort as the rail co-efficient (quantity moved by rail out of production and imports) has declined (Table).Except for coal and cement, there has been a decline in the rail co-efficient of other commodities; this should have been gone into and remedial steps initiated.

The loading target for the current year has more or less been maintained at the Budget Estimate (BE) level unlike previous Budgets when upward revisions were made. Loading target for the next year, at 785 million tonnes, reflects a lower growth in percentage terms. Probably, iron ore exports to China, which were booming, may come down with the Olympics scheduled to start in 2008. In this scenario, the Railways should have initiated moves to capture other commodities to fill the gap. These need not be tariff-related as with successive simplification and rationalisation, the Railway rates are quite competitive even now.

Replacements and renewals

Provision for replacements and renewals had become imperative with the intensive utilisation of assets with the increased number of freight trains, heavy axle loads and adding of coaches to passenger trains. The Depreciation Reserve Fund is the financing mechanism for this purpose. In the 2005-06 Budget, the Railways had promised to assess this realistically and transparently.

However, the appropriation to the Depreciation Reserve Fund for the current year has actually been brought down from the budgeted Rs 4,307 crore to Rs 4,108 crore not withstanding a whopping increase in the internal resource generation before payment of dividend. This is a matter for concern.

The Railway Budget projects a closing Fund balance of Rs 16,000 crore (BE: Rs 12,819 crore) and Rs 16,170 crore for the next year. It has indicated that the interest, hitherto credited to the Fund, will now be treated as miscellaneous receipts. As per the BE, the interest element was about Rs 730 crore.

Considering that the fund balances have been rising significantly in the last few years, the increase projected for the next year is marginal. This is probably attributable to a 32 per cent rise in the Plan outlay for the next year.

Investment strategy

The investment strategy of the Railways should take note of the accelerated double-digit growth of the economy. Infrastructure should not be found wanting and bottlenecks have to be eliminated.

The Railways has been systematically addressing this, through capacity augmentation work, new lines particularly port connectivity works, doubling, electrification, etc. The announcement about the setting up of Dedicated Freight Corridors and the assurance that they would be completed by 2008 should be appreciated by industry.

The Budget seeks to ensure that the rolling stock required for movement of the 1,200 million tonnes of freight by 2012 is made available. The setting up of diesel and electric loco factories, the huge investments in containers, the stepping up of wagon and coach production are all necessary initiatives.

Annual Plan

The Annual Plan Expenditure for 2007-08 has been kept at Rs 31,000 crore, up 32 per cent over the BE provision for 2006-07. Adequate allocations have been made for the various Plan heads consistent with the announcement of addition of 3,000 km of track under new lines, doubling, etc.

Some of the innovative measures announced in the Budget deserve appreciation. These include the proposal to include wagons of 15-20 tonnes, the change in the dimension of the containers to enable running three stacks, and the increase in the seating capacity of the various types of coaches. However, these measures will take a few years to fructify.

On the whole, the Budget has as its focus the need to contain inflation, equip the system for future growth and make the Railways comparable to any other world system in regard to provision of amenities and facilities for passengers. While the freight sector initiative and investment strategy appears to be in the right direction calling for marginal refinements to increase the rail reduction, the cut in fares across-the-board may be a source for concern.

Further, the growth in ordinary working expenses at 13 per cent projected for the next year providing for payment of interim relief pending the Sixth Pay Commission's recommendations as against the current year's level of 9 per cent is also a matter to worry. More so because the Operating Ratio is expected to marginally increase during the next year to 79.6 per cent from the current figure of 78.7 per cent.

Whether the strategy of higher volume growth will be successful to thwart the adverse effect of these factors can only be a matter of speculation at this juncture.

(The author is a former Financial Commissioner, Railway Board.)

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