One thing is clear from the 2016 Railways Budget announced by Narendra Modi’s hardworking Railways Minister Suresh Prabhu on Thursday—the Railways doesn’t have enough resources to find its grand expansion plans on its own. It plans to rely heavily on a debt-driven growth strategy - Rs 1.5 lakh crore from the government’s forever milch-cow Life Insurance Corporation of India (LIC) over next five years and the rest from the market through issuance of instruments such as Rupee bonds overseas.
As for meeting its mandatory expense, including an additional Rs 32,000 crore burden on account of 7th Pay Commission implementation, cost over run of projects (costs of railways have overshot to about Rs 80,000 crore from initially estimated Rs 22,000 crore on account of delays), Railways will have to look toward the government, which typically foots lose to 41 per cent of its bill every year. This year, with the 7th pay proposals setting in, the government’s share can go even more.
Muted earnings from the freight segment (overall freight earnings growth fell from 12.7 percent in 2014-15 to 5.7 percent in 2015-16) and losses on account of heavy subsidization in passenger segment (Rs 30,000 crore in fiscal year 2016), there aren’t much to expect from the internal profit generation to fund overall expenses ( which constituted about 17% in last year). A sharp recovery in economic activity could translate into more freight movement on railways tracks. But, Prabhu has only himself to blame for losses generated from heavy subsidization of passenger segment with freight services.
The logical reason why Prabhu opted not to raise the fares is the upcoming state elections and the already visible impatience among the middle-class on Modi government with respect to the delay in progressing with the people friendly development agenda. A fare hike would have been a politically bad move for Prabhu to opt at this juncture and he rightly chose not to take the bitter pill. But, where does that leaves the financials of the Railways? In the fiscal year 2016, Railways has posted 7.1 per cent growth in gross traffic receipts , compared with 12.3 percent in the preceding year. Total net reduction in gross traffic receipts by Rs 15,744 crore compared to budget estimates of Rs 1,83,578 crore. Railways need to watch out for a few factors:
One, The interest burden on account of huge borrowings both from LIC and bondholders in the market (if the Rupee bond plan receives good response) would boomerang on the financials of Railways over the next year if it fails to improve its financial performance and bring in more revenues to provide sufficient cushion to cover its interest payments. Else, it can fall into a debt trap like in the case of many other public sector units.
Two, the idea of state-owned LIC funding Railways growth plans would ultimately mean government indirectly taking up additional burden. This is against the spirit of larger idea of driving the growth of railways on the back of private investments. LIC has been traditionally the milch cow of the government being used to bail out PSU companies. But, this isn’t an economically sustainable model in the long-term for railways, which should instead, look for private capital to take the institution to next level of growth.
Prabhu has outlined plans to push ahead with PPP model joining hands with the state-governments to ensure speedy project implementation. Prabhu should focus on more private sector participation rather than increasing government support (directly and indirectly).
Three, the weak financial position of the railways and the kind of money it would require in future years to keep the organization on track (already , there is huge erosion on freight traffic, also on account of people shifting to road transport of goods than railways) gives room for further debate on partial privatization of railways to improve efficiency. The government doesn’t necessarily need to let loose its control on Railways but can bring in private partners in some areas wherever it deems fit (like manufacturing and operations of coaches and revamping stations).
Four, it is even more critical for Prabhu to keep politics at an arms’ length from Railway’s policies and approach its financial/operational management like the CEO of any private institutions would do. The point here is systematic fare hikes on the passenger segment, simultaneously improving the service quality is highly critical to regain railways financial health. Prabhu should learn from the case of sick state-electricity distribution companies, where no tariff hikes were done for several years taking the power distribution system to the point of a crisis.
Evidently, the passenger fare hikes is a politically sensitive issue and can evoke public uproar in the short-term. But, Prabhu’s courage to go for tough measures would be appreciated in the long-term.
The bottomline is this: Prabhu’s high reliance on the debt-driven growth strategy for Railways has serious risk issues. A chartered accountant should understand it better than anyone.
(Kishor Kadam contributed to this story)
Published Date: Feb 26, 2016 12:56 pm | Updated Date: Feb 26, 2016 03:40 pm