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Indian Railways: from boom to bust

Indian Railways: from boom to bust
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First Published: Tue, Jul 14 2009. 01 15 AM IST

Drawing down: Mamata Banerjee. Rajkumar / Mint
Drawing down: Mamata Banerjee. Rajkumar / Mint
Updated: Tue, Jul 14 2009. 10 17 AM IST
New Delhi: Presenting her third railway budget and the first of the new government that took over in May, rail minister Mamata Banerjee surprised many people when she flagged the sharp fiscal deterioration in the department—a flashback to her first stint at the job, when Indian Railways hit a financial crisis forcing it to default on its annual dividend payments to the Union government.
Banerjee said that her ministry would soon bring out a “white paper”, or study, explaining the state of the department’s finances.
Drawing down: Mamata Banerjee. Rajkumar / Mint
While Banerjee hasn’t set a deadline for the presentation of the white paper, the minister has already blown a hole in the claim of her predecessor, Lalu Prasad, that he had rescued the railways from fiscal ruin and also set it on the path of a sustained recovery.
In fact, as Mint had reported on 6 June, portions of Banerjee’s budget speech that were edited out provided data to back the new rail minister’s claim.
One such paragraph said that the balances in several railway funds parked with the Reserve Bank of India were projected to decline from Rs22,279 crore in 2007-08 to Rs8,361 crore by 2009-10.
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“To fund our massive network expansion programme, completion of capacity enhancement works and timely replacement of overaged assets, the Plan Expenditure has been sustained in the two years of 2008-09 and 2009-10 through draw-down from our accumulated fund balances, which may not be possible in the future,” the version of the speech which was not read said.
The Lalu Prasad years
The story of the railways till Prasad took charge was that of a bloated and direction-less public sector undertaking. However, the five years Prasad was at the helm saw a dramatic turnaround in the organization’s basic financial metrics. When he took charge, the railways was spending Rs91 to earn Rs100—often referred to as the operating ratio, or the proportion of expenses to income. Just before he demited office in 2009, the railways was spending Rs88.30 to earn Rs100, leaving the country’s biggest transporter with a tidy surplus. In his interim budget, Prasad projected that this would slip, but marginally to Rs89.90.
But, as Banerjee found out, the projections were conservative and she has now estimated that the number will rise to Rs92.50—the worst since 2002-03.
The debate, consequently, has shifted to how Prasad effected the improvement.
According to Sudhir Kumar, the officer on special duty who is credited with spearheading the strategy to transform the railways, it was managed by “focusing on what works”. In his book Bankruptcy to Billions: How the Indian Railways Transformed (co-authored with Shagun Mehrotra), Kumar claims that the organization went from near banktruptcy to $6 billion (Rs29,640 crore) in surplus.
Lalu Prasad could not be reached for comment and Kumar did not respond to a call made to his office.
But analysts maintain that much of the gains have to do with a combination of one-off factors and an unprecedented boom which saw the country transform into a trillion-dollar economy. Writing in Mint on 27 February 2007, immediately after Prasad’s fourth budget, Partha Mukhopadhyay, an expert on the railways and a senior fellow with the Centre for Policy Research, a think tank, said, “The growth story, thus far, has been built largely on utilization of slack in wagon loading and turnaround, with some revenue coming from tweaking freight rates. That slack is now largely gone.”
Mukhopadhyay was referring to the 1.17 days of transport time that Prasad saved per train by reducing turnaround—thereby deploying more trains—and at the same time increased the carrying capacity of wagons.
Prasad’s tenure also saw the railways improving on another parameter: In 2004-05, the net tonne km per wagon per day (a function of number of wagons multiplied by weight per wagon multiplied by distance travelled per day) was 2,677. By 2007-08, this had touched 3,539, enabling the department to free up much-needed capacity without having to invest substantially in increasing the network.
Further, as Mukhopadhyay pointed out, the aggregate revenue numbers of the railways mask the increase in freight rates, often effected outside the budget. This was achieved through the reclassification of commodities under higher rate slabs.
In the five years of Prasad’s leadership, the railways, beginning 2004, issued 55, 76, 114, 111 and 84 freight rate circulars, respectively. Of these, as many as 22 dealt with the reclassification of commodities. Additionally, the railways instituted what it called a dynamic pricing policy, allowing it to levy surcharges for congestion or during the busy season.
In contrast, the railways issued 68 freight rate circulars in 2002 and 35 freight rate circulars in 2003.
For instance, in May 2008, despite Prasad not increasing freight tariffs in his budget presented in the February of the year, iron ore exporters found themselves having to pay as much as 60% more than they did earlier. The ministry, in a circular issued to all zonal offices of the department, reclassified iron ore under a higher frieght rate band.
That was also the fourth such increase for the product in four years.
To be sure, a few revisions also involved a cut in rates. For instance, iron ore was reclassified under a lower price band in the second half of 2008 after global prices of the commodity crashed. But in June 2009, when prices firmed up again, the railways began charging a distance based surcharge of as much as 125% the basic tariff for the classification.
A former Railway Board official who was involved in rationalizing tariffs said the railways was forced to make these repeated changes because it was paid rather poorly for transporting several commodities.
“Railways have approached the finance ministry a number of times seeking a subsidy on transport of foodgrain and other commodities. But this was never agreed to and we were forced to suffer losses,” added this person, who did not wish to be identified.
In 2008, however, as the economy slowed, the railways lost revenue from freight. By then, the the effects of one-off gains too had run out. Finally, since expenses continued to grow, bumped up significantly following the implementation of the pay commission’s recommendations on salaries of the department’s employees, the transporter was forced to dip into its cash reserves.
Meanwhile, its operating ratio deteriorated. Operating expenses grew at an average of 13.3% during the tenure of Prasad, as opposed to an average of 6.49% in the first four years of this decade. Revenues during these periods grew at 13.95% and 6.79%, respectively.
“The railways under Lalu Prasad increased revenues like never before. If, consequently, the rate of growth in expenditure also increases, it is but natural,” said a former Railway Board officer who was part of Prasad’s team and did not want to be identified.
Looking ahead
In his last full rail budget in 2008, Prasad set out a bold vision statement proposing a massive increase in spending to the tune of Rs2.5 trillion in five years. Of this, Rs1 trillion was to come from the private sector through the public-private partnership (PPP) model. The private investments, Prasad said, could come through a range of activities including building shelters at small stations, developing four large stations into “world-class” ones, and creating so-called multi-modal logistics parks and developing land among others. In 2008-09, the railways planned to award concessions worth Rs25,000 crore.
However, these initiatives did not take off, which means that the railways has no way of tiding over its current resource crunch.
In fact, Banerjee alluded to the over-estimation of resources accruing through PPP in her speech on 3 July, saying, “I was surprised to find that there was a provision of Rs3,400 crore for resource mobilization through PPP, of which Rs3,300 crore would just not materialize.”
The final verdict on the Prasad years will have to await the white paper.
“Lalu Prasad reaped the benefit of what (former railway minister) Nitish (Kumar) did. Prasad concentrated on profit and loss for the day. Nitish invested in the future balance sheet. ...I am absolutely not denigrating Lalu Prasad’s achievements, but if you don’t invest in the future, the law of diminishing returns sets in,” said Akhileshwar Sahay, a former railway employee who heads government and multilateral advisory services at infrastructure consultancy, Feedback Ventures Pvt. Ltd.
Graphics by Ahmed Raza Khan / Mint
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First Published: Tue, Jul 14 2009. 01 15 AM IST