Indian Railways: faith-based budgeting
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Reacting to the railway budget, one industry stakeholder told a business news channel that he was happy with the announcements as long as he didn’t think about how they would be funded. That aptly sums up the mood on the Street, which dumped railway-related stocks after the budget was presented.
The highlight, of course, is the scaling up of capital expenditure (capex) to Rs.1.2 trillion for the next fiscal year, which is entirely commendable. But believing the big numbers requires a leap of faith.
First, the targets set for the current fiscal year are seeing sharp cuts. Capex for the current year has been revised down from around Rs.1 trillion to Rs.82,192 crore. To be sure, that’s far higher than what the railways has been clocking for years. But as of December, the national transporter spent only 64% of the revised capex target, an increase of less than one-fourth from the year-ago period.
The second problem is resource generation. After meeting all expenditure, Indian Railways is estimated to generate net revenue of Rs.18,210 crore in the next fiscal year. It is not only 8% less than the current fiscal year’s revised estimate (which itself has been cut) but is also prone to serious downward revisions.
Total traffic receipts (both from freight and passenger fares) are estimated to rise 10%, optimistic considering the lack of upward revision of tariffs. As in the previous budget, the ministry is projecting a double-digit (12%) growth in passenger earnings, when the number of passengers is actually declining. The expected fall is 1.5% in the current fiscal year. This year, passenger revenue is expected to go up by 7%.
True, freight revenue growth projections are realistic at 5%. But lack of time-bound measures to revive the flagging volumes—estimated to grow just 1% in the current fiscal year—has been a disappointment.
Of course, a significant part of the Plan expenditure is funded by support from the Union budget, borrowings and institutional finance. But as Religare Capital Markets Ltd points out, resources from all these sources have fallen short of budget estimates. If economic activity does not see a meaningful recovery and the government’s fiscal position remains stretched, then it is likely the budgetary support for next fiscal year will also be constrained.
The railways plans to further lower costs and boost non-traffic revenue. While the ministry has achieved some success in cost-control measures, non-traffic revenue is showing no signs of improvement yet—in fact, it is expected to fall 8% this year.
All this gives way to some doubts about the budget estimates. “The poor performance in FY16 has few excuses, unless the projections for FY16 were too ambitious to begin with,” Religare Capital Markets wrote in a note. “One cannot help but be sceptical of FY17 projections, therefore, especially on the funding part of the planned expenditure.”
However, there is no denying that the railways’ capex is growing. As Dilip Bhat, joint managing director at Prabhudas Lilladher Pvt. Ltd, points out, even if the railways manages to achieve capex of Rs.1 trillion next fiscal year, it will be a significant improvement from the Rs.40,000-60,000 crore the organization was spending some years back.
While that is a clear indication of the government’s push to kick-start growth through increased public investments, the fact remains that the numbers need to be taken with a pinch of salt.