Passenger and freight revenues of the Indian Railways are way below targets for this year and key ratios are under pressure, but this did not deter Railway Minister Suresh Prabhu from embarking on a long journey to reform that will take the leviathan through uncharted territory.

Presenting the Railway Budget for 2016-17, Prabhu spoke a new language, more like a corporate consultant than a politician, as he resolved to review the tariff and freight policies that have resulted in the Railways ceding considerable ground to alternative means of transport. His 70-minute speech was interspersed with references to zero-base budgeting, data-based decision- making, and KRAs (key result areas) for top managers.

“IR [Indian Railways] typically has focussed on increasing revenues through tariff hikes. We want to change that and challenge our conventional thinking on freight policies to win back our share in the transportation sector,” he declared, adding, “The current tariff structure of IR has led to out-pricing of our services in the freight market. A review of tariff policy will be undertaken to evolve a competitive rate structure vis-a-vis other modes.”

Key points in Railway Budget

If that’s not enough to bring cheer to industry, Prabhu also spoke of the possibility of signing long-term tariff contracts with key customers with in-built price escalation clauses, which will offer visibility for both parties on revenues and costs. The inter-modal share of the railways dropped to 36 per cent in 2012 from 62 per cent in 1980. In an effort to “reorient the working of the organisation towards a common corporate objective,” Prabhu has proposed reorganising the Railway Board on business lines with cross-functional teams being set up to focus on such areas as non-fare revenues, speed enhancement and information technology.

A team will be set up to carry out analytics on the more than 100 terabytes of data that the Railways generates annually. Procurement, including works-related, will move to an e-platform and paperless contract management system will be implemented with online bidding and tendering.

Twin headwinds The Minister conceded that he faced twin headwinds from the tepid economy and the impact of the 7th Pay Commission award, but has projected only a slightly higher operating ratio of 92 per cent for 2016-17, compared to the revised estimate of 90 per cent in the current fiscal. Operating ratio is a measure of efficiency that denotes the amount spent for earning every ₹100 of revenue. The lower the ratio, the better it is.

Prabhu hopes to keep the ratio in check by optimising on costs and finding alternative sources of revenue. In the current year, the Railways would shave off ₹8,720 crore from budgeted costs and thus neutralise most of the revenue shortfall.

Despite a slump in passenger and freight revenues this fiscal — revised estimates lowered for both — Prabhu has projected for 2016-17 a 12.42 per cent increase in passenger revenues and 5.43 per cent increase in freight revenues, which account for two-thirds of its total earnings. The gross revenues of ₹1,84,820 crore set for 2016-17 is 10.1 per cent higher than the revised estimate for the current fiscal.

The Budget has factored in incremental freight traffic of 50 million tonnes, which is a big bet on growth returning to the core sector of the economy. The incremental freight traffic in the first 10 months of this fiscal was just 11 million tonnes compared to the 85 million tonnes budgeted for the whole year.

For meeting the requirements of 7th Pay Commission award, Prabhu has provided a sum of ₹12,000 crore towards salary and about ₹8,500 crore towards pension for 2016-17, officials said. Besides this, the allowances component would be decided by a committee of secretaries.

“We have managed to break away from the average capital expenditure of ₹48,100 crore over the period 2009-14, and an average growth of only 8 per cent per annum, to achieve a quantum jump. This year, our investment would be close to double of the average of previous years,” Prabhu said, adding that capex will grow exponentially from hereon. The capex for 2016-17 has been pegged at ₹1.21 lakh crore.

Funding options Funding will be explored through joint ventures with States, public-private partnerships and launching rupee bonds in international markets. These will be in addition to gross budgetary support of ₹45,000 crore. The Railways will also have access to about ₹30,000 crore this fiscal from the ₹1.5 lakh crore committed by LIC over five years. Prabhu said that a Fund with multilateral assistance for financing railway projects would also be set up.

The Minister announced three more Dedicated Freight Corridors — Delhi-Chennai, Kharagpur-Mumbai and Kharagpur-Vijayawada — in addition to the two already under implementation. By the end of the current fiscal the Railways will have commissioned more than 2,500 km of broad gauge lines, which is 30 per cent higher than last year. It is now poised to commission broad gauge lines at the rate of 7 km/day compared to 4.3 km/day over the last six years.

Prime Minister Narendra Modi called the Budget as one that will have a long-term positive impact by effective execution, enhanced capital investment and infusion of technology.

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