BackRailways requires surgery, not pep pills
The latest fare and freight hikes will not give Indian Railways enough money to go in for extensive capital expenditure
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The government’s bitter pill on railway fares and freight rates is not enough to nurse Indian Railways back to health. The patient needs major surgery, not pep pills.
In a largely knee-jerk reaction, the decision to increase railway fares has led to buying in the shares of companies that depend on the railways. Stocks of Texmaco Rail and Engineering Ltd and Titagarh Wagons Ltd gained a bit on Monday. The expectation is that the new funds will help the railways spend more on spares and modernization.
“A positive fallout of the government decision would be that the railways will be able to increase their expenditure on safety, signalling systems, modernize their rolling stock and improve passenger amenities," said a note from HDFC Securities Ltd.
According to SBI Research, the fare hike can increase revenues of the railways by ₹ 8,753 crore. The new funds can help bring down the operating cost ratio (expenditure to revenue) from an estimated 89% to around 85% in the current fiscal year.
The problem, however, is with the estimates. Railway ministers are invariably of an optimistic bent of mind and have a habit of projecting strong growth in passenger and freight earnings. With the economy proving to be anything but strong, the railways did not meet revenue targets. In the last fiscal year, for instance, actual revenues were lower than budget estimates. Expenses are rising faster than earnings. Simply put, if revenues do not rise as projected in the current fiscal year, all that the latest fare hike can do is help Indian Railways meet the budget estimates.
Contrary to perception, the increase in fares would barely be sufficient to meet the 2014-15 interim budget revenue estimates, Religare Capital Markets Ltd said in a note.
If revenues only meet budget estimates, orders may not see an unusual jump. In that case, the worry is that the railways may continue to mete out relatively smaller work orders relating to repair and refurbishment. As a percentage of total expenditure, spending on rolling stock has fallen slightly in recent years.
Big-ticket orders can come when Indian Railways steps up modernization or invests in new tracks and capacities. That can result in fresh orders for rolling stock, wagons, signalling systems and so on. The latest fare hike, unfortunately, does not guarantee any of that.
What it points to, however, is the government’s intention to put railway finances in order, which can ensure timely payments for vendors. Once Indian Railways is self-sufficient, the government can concentrate on building new capacity that can result in big orders for companies that are in the business.
Aided by a policy push, many expect such investments to gather pace. “The company is buoyant on the prospects of rolling stock division with the expected thrust in rail sector by a strong and stable government," Texmaco Rail said while releasing last fiscal year’s earnings in May. To encourage private investment, the government is reportedly looking to relax foreign direct investment rules in the sector.
To sum up, the latest fare and freight hikes will not give Indian Railways enough money for extensive capital expenditure. For that, railway reforms are a must. While hopes of reforms and capex are driving up the stocks of companies that serve Indian Railways, the budget will provide clarity on the government’s game plan for the sector.
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