Cut in fuel costs save Prabhu but great work on capex
Suresh Prabhu’s first railway budget envisioned an ambitious spend of Rs 8.56 lakh crore over a five-year period, to help de-congest the existing network and expand it via some innovative fund-raising and some help from the private sector. The fresh approach to raising revenues was to be applauded, as were the minister’s efforts to usher in commercial accounting as suggested by the Debroy committee. While it will take a while for Indian Railways to morph into a more efficient organisation with prudent account-keeping practices, the minister appears to be making headway with improving the quality of the railway network. If the estimates for capital spends that FE reported on Wednesday—R58,000 crore at the end of December—are indeed correct, FY16 could see a total capital spend of close to R70,000-75,000 crore, a really big achievement given the railways have never invested such large sums in such a short time. More crucially, the money is understood to have been spent on doubling and electrification, which will help the Railways add share in the freight segment. Given the Railways cannot raise freight rates further without losing market share to roads, it must add capacity—the recent changes in wagon design to raise the effective payload per wagon will also help.
At an operational level, the minister who hoped to kick off this innings by ushering in greater efficiency levels, would be disappointed since revenues are likely to fall short of the target for both passenger and freight. Freight receipts were projected to grow at 13.6% to Rs 1.21 lakh crore, but till the first week of February had grown by just 5% despite a hike in freight rates by 3-10% for coal, cement, food-grains and urea. Since the revenues from goods typically contribute two-thirds of the overall business of the Railways, this is a big failure though the target was always unrealistic given how sluggish the economy has been—that is borne out by the marginal rise in tonnage, of just 1% against a projected 7%-plus.
In FY17, the minister must raise fares because the subsidies—at around Rs 30,000 crore—are simply too much of a burden on the bottom line. Latest estimates show passenger revenues have risen at just under 6% against a target of 16.7%. Even a rise of 10% by March will leave a shortfall of Rs 4,000 crore, given the target of Rs 50,200 crore. What will save Prabhu a few blushes is the saving on fuel costs—around Rs 5,000-6,000 crore—and some other savings that could leave the total working expenses smaller than the budgeted Rs 1.63 lakh crore; since the fuel savings were not passed on to customers, in real terms, this can also be seen as a hike in passenger/freight charges in FY16. However, even if the operating ratio, pegged at 88.5%—down from 91.8% in FY15 and 93.6% in FY14—comes in at below-90, it would be more the result of costs being reined in. That is something Prabhu will not be able to do next year; the burden from the Seventh Pay Commission will be Rs 28,500 crore—arrears included, it could be around Rs 40,000 crore. Also, given nominal GDP in FY17 is unlikely to grow at more than 8.5%, the revenue buoyancy will remain subdued. Since the finance ministry is not about to foot the additional salary bill and the budgetary support could be reduced too as it has been in FY16, FY17 will be a very tough year, as any year following a pay commission is. Hiking passenger fare is critical, but isn’t going to give Prabhu anywhere near what he needs.