End the rail budget, run railways on commercial lines

August 28, 2016, SA Aiyar in Swaminomics | Economy, India | TOI

For decades I have argued that the railway budget is a colonial aberration that should be abolished. Wonder of wonders, the government now agrees. Arun Jaitley’s next budget will incorporate all railway revenue and spending, so there will be no separate railway budget.

This paves the way for treating the railways as essential infrastructure with the best financial and technical management, instead of a political tool for populism and patronage.

During the British Raj, the railways were easily the largest commercial enterprise in India, dominating government finances. So, the Raj devised a separate railway budget. This practice continued after Independence. Railway revenue in 1950-51 was Rs 232 crore, not far short of government revenue of Rs 347 crore. But soon many new government corporations became bigger than the railways.

Today, annual railway revenue at Rs 1.84, lakh crore is less than one-tenth Central government spending. Railway revenue is less than the 2014-15 revenue of Indian Oil Corporation (Rs 4.49 lakh crore), BPCL (Rs 2.42 lakh crore), State Bank of India (Rs 2.07 lakh crore) or HPCL (Rs 2.06 lakh crore). In the private sector, Reliance Industries has an annual income of Rs 2.76 lakh crore.

Clearly, there is no case for a separate railway budget. The railways should be converted into a number of corporations whose shares are sold to the public. The railways already have 14 corporations for different functions, of which the Container Corporation of India is a blue chip listed in the stock market.

Railway Minister Suresh Prabhu has long bemoaned a shortage of funds for investment. Corporatising the railways and selling a 25% stake, for starters, will fetch enough to finance major rail expansion. The corporatised entities will also be able to raise commercial loans for investment.

Listing all rail corporations on stock markets will hugely improve public oversight and scrutiny. It will shift the focus to commercial principles from today’s patronage politics and populism. Corporatising the railways was promised by the Modi government in its early months, but then put on the back-burner. Abolishing the railway budget should be followed by corporatisation.

Why has abolition taken so long in independent India? Because politicians love misusing the railways for personal gain. A separate railway budget, complete with a budget speech, is highlighted by the media as a national financial event, and gives the railway minister a special prestige and aura. Many politicians, contractors and trade unions love the status quo.

Keeping the railways as a government department with a separate budget has led to gross neglect of financial principles and cynical politicisation of railway finances, performance and jobs. India had easily the biggest rail network in the developing world at Independence. But now China has forged ahead, building a line to remote Lhasa, while India still struggles to complete a line to Srinagar.

Back in 1992, a report of the Asian Development Bank estimated that the railways had half a million excess workers. These were never trimmed, since trade unions objected, and politicians used the railways to provide jobs to their constituents. Suresh Prabhu is the first railway minister who is a technocrat with no political base. That explains why he fully supports rail budget abolition. Hurrah!

In the 1980s, Railway Minister Abdul Ghani Khan Choudhury became famous for treating jobs and contracts as political tools. When Ram Vilas Paswan became railway minister in 1996-98, he made his own parliamentary constituency (Hajipur) a zonal railway headquarters.

Mamata Banerjee announced several new passenger trains in her own state. Sonia Gandhi decreed that a rail coach factory come up in her constituency, Rae Bareli. It is outrageous that one of India’s biggest commercial undertakings has long been treated as a political plaything. No wonder India transport logistics are poor even by Third World standards.

Passenger travel is not an essential good requiring subsidies. Yet successive railway ministers have kept raising freight rates to keep passenger rates artificially cheap. An analysis by Avinash Celestine in The Economic Times revealed that the ratio of freight to passenger rates rose in India from 2.13 in 1950 to 3.68 in 2014. In China, it is less than one. That’s why China is a low-cost, highly competitive country, while India is the exact opposite.

If Modi wants the world to come and Make in India, he must create a world-class rail system that is technocratic, not a political tool. Achieving that requires abolition of the railway budget and corporatisation of the railways.