Friday, February 3, 2017

Public investment will build up the hardware, but it must be supported by upgrading the railways’ software

Illustration: Jayachandran/Mint

The merger of the railway budget with the Union budget was one of the major highlights of the budgeting exercise this year. What received less attention was the discontinuation of the practice of dividend payment from the Indian Railways to the government of India. When the railway budget was separated from the Union budget, as recommended by the 1921 Acworth committee report, it was done in exchange for the annual dividend. The reasoning was, as the Debroy committee report (2015) notes, “to preserve the commercial character of the Indian Railways”. Also, net revenue of the railways accounted for about one-seventh of the revenues of the government of India. Today, the less said about the commercial character of Indian Railways the better. And the railway revenue hardly adds to that of the government. Hence, the Narendra Modi government has done well to do away with the practice of both a separate railway budget and the payment of dividends.

If the accrual-based financial statements are rolled out—as pledged by finance minister Arun Jaitley in his fourth budget speech on Wednesday—by March 2019, these steps cumulatively will go a long way towards, in the words of the Debroy committee report, “restructuring the financial relationship between GOI (government of India) and IR (Indian Railways) into a rule-based relationship”. Finance and accounting reforms are among the four major focus areas of the railways as laid out in Jaitley’s budget speech. The other three are: passenger safety, capital and development works, and cleanliness.

The vision of this government for railways has largely to do with public investment. This is also broadly the story of the Indian economy battling weak private investment, stalled projects and stressed banks. The amount allocated by the government to the railways for 2017-18 is a hefty Rs55,000 crore—an increase of 18.65% over the revised estimates for 2016-17. When compared to the actual amount spent in 2015-16, the jump is a massive 57.1% in the last two years.

This trend is not surprising. In his first railway budget in February 2015, minister for railways Suresh Prabhu had singled out “chronic underinvestment in Railways” as one of the major reasons behind the problems besetting India’s transport lifeline. He envisaged an investment of Rs8.5 trillion in five years. In three years (2015-16 actuals, 2016-17 revised estimates, and 2017-18 budgeted estimates) since, he is on his way to spend close to Rs3.5 trillion under the head of capital expenditure. Even if Prabhu’s ambitious target seems to be out of reach, his performance on this count is commendable. Other than gross budgetary support, Prabhu has also been very successful in raising extra budgetary resources.

There are, however, limitations to this strategy as Indian Railways cannot simply spend its way out of trouble. The rise in extra budgetary resources is accompanied by a fall in the portion of internal resources meant for capital expenditure. Indian Railways missed its target of operating ratio—the ratio of working expenses to gross earnings—last year. The operating ratio was not announced by Jaitley on Wednesday but the numbers on internal revenue generation, the budgeted rise in net revenue expenditure (slightly exceeding the growth in capital expenditure) and falling railway earnings in the first half of this fiscal year are not encouraging signs.

Safety is another aspect which has come back into focus on account of a spate of train accidents in the past few months. While the investments in doubling and tripling of lines and acquisition of new technology will undoubtedly help, safety is also hampered by the lack of an appropriate organizational structure, as was pointed out by this newspaper ( This budget did announce the creation of a Rashtriya Rail Sanraksha Kosh with a corpus of Rs1 trillion over a period of five years, but it is unclear how the railways will fund this corpus outside government outlays without getting the passenger and freight tariffs right.

It was in January 2016 that the ministry of railways released a concept paper on the creation of a regulator but the matter has hardly seen any progress since. It will be difficult for the railways to attract private companies to operate their trains or own infrastructure unless they are guaranteed the right to decide their own tariffs and non-discriminatory access to assets owned by Indian Railways.

True competition between Indian Railways and other private companies which may want to enter can be engendered only if the cross-subsidy from the freight to passenger business is ended entirely. The shortfall in passenger revenue can be met directly from government disbursements. In addition, there is a need to separate the commercially viable part of Indian Railways from the important social obligations it carries out (for example, providing transport in the North-Eastern states where it is difficult to attract private investors). Indian Railways can then compete on fair terms with private companies on commercially viable routes.

Completion of accounting overhaul will help chart further steps but the government has given little indication of whether it wants to pursue these crucial reforms. Public investment will build up the hardware but it will, inevitably, have to be supported by upgrading the software of Indian Railways.

What is the most pressing reform that the government must take up next? Tell us at


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