New Delhi: Missed revenue targets, less than expected budgetary support and good intentions marked Railway Minister Suresh Prabhu’s first fiscal year. And though he has laid the blame of falling revenue receipts at the door of a poor Indian economy, the minister has simultaneously made a new set of promises for the coming fiscal. What is his optimism based on? Does he believe he will be able to achieve revenue targets for FY17 whatever the state of the Indian economy is? Remember, two-thirds of Railways' earnings are from goods carriage which, in its current mix, is largely dependent on the state of the economy.
Prabhu must be given full marks for keeping a tight control over costs to result in significant savings this fiscal as also the ability to adhere to his investment commitments. But perhaps good intentions and transparency may not be enough for him to achieve the ambitious targets set for FY17: Rs 8,479 crore net surplus even though total expenditure will rise more than 12% to Rs 1,71,060 crore.
Prabhu’s Niti Ayog colleague admitted that targets the Railways had set for itself in FY16 were optimistic before going on to tell CNBC-TV18 that those for the next fiscal too may be on the optimistic side. To be fair to Prabhu, it is no mean feat to turn around the Indian Railways as any decision on its prime revenue generator, fares, is a political one. Add to that a skewed revenue basket where freight accounts for two-thirds of earnings, the task becomes even more tougher.
Besides, earnings from freight have been falling steadily as roads are being preferred for transporting goods. Another spanner in the works is manpower - 51 paise of every rupee earned by the Railways goes into paying wages plus pensions to its employees and this hurts the Railways’ bottomline significantly. In fact, as per Budget estimates for next fiscal, Prabhu has raised the provisioning for pension payouts by a whopping 23 percent or Rs 8,000 crore. This is breaching earlier estimates and even projections made by the White Paper presented on the Indian Railways.
In his speech today, Prabhu made many pronouncements on initiatives to improve finances, increase capex, improve organizational structure and keeping passengers happy. But he was also forced to admit that a slowing economy has meant the Railways missed out on its targets for both, passenger and freight earnings for FY16. Setting optimistic performance targets is one thing but achieving them in a turbulent economy is quite another. Prabhu has quietly advanced many of the revenue and operational targets initially set for 2015-16 to the next fiscal.
Sachin Bhanusali, CEO of Gateway Rail Freight told CNBC-TV18 that the speech of Suresh Prabhu was peppered with good intentions but it would have been better to get a blueprint on how all the money that needs to be invested will be generated. Remember, the Railways has said its Plan Outlay for FY17 is Rs 1.2 lakh crore, of which it sees Rs 40,000 crore as gross budget support and about Rs 20,000 crore to be raised through borrowings.
Mukesh Butani, Managing Partner, BMR Legal pointed out that subdued growth in revenues – both passenger and freight – presented a compelling reason for another increase in fares. “But Mr Prabhu didn’t give in to hiking fare as an easy solution to resources woes. Instead, he has proposed enhanced revenue mobilization through more innovative means…… Significant increase in capex – projected to double from the average of previous year – should facilitate modernization of railways.”
Debory said Prabhu may wait for the establishment of the Railway Development Authority (or a regulator for the Railways) before effecting any fare decisions. He also effectively hinted at a downward revision in freight rates. Either way, Prabhu has been prudent in not announcing any fare decisions at all in his speech today and may instead look to take these decisions during the course of next fiscal.
As per the revised estimates for the current fiscal and budget estimates for FY17, Prabhu has shown an almost 10 percent decline in passenger revenues, almost 8 percent decline in freight revenues and a 9 percent decline in overall revenue receipts this fiscal. This has pushed up the operating ratio to 90 percent against the target of 88.5 percent. What is notable here is that Prabhu has set almost identical targets for revenue generation in the coming fiscal, having missed FY16 gravy train. A more worrying target though is that for pension payouts: Rs 42,500 crore next fiscal against revised estimates of Rs 34,500 crore for the current fiscal. That’s a jump of over 23%.
This, when Axis Capital has noted in its latest report on the Railways that with “many retirees” over next two years, this is an opportune time for manpower rationalization but politics remains a roadblock. According to the White Paper on Indian Railways presented last year, the number of retirees was pegged at 57,233 in FY16 with pension outgo estimated at Rs 33,546. For the next fiscal, estimated number of retirees is 57,682 with pension outgo pegged at Rs 39,417. The provisioning we see in Prabhu’s second Budget is far more.
Now let’s come to fares. Many have lauded the minister for resisting the temptation of raising passenger fares but a Morgan Stanley analysis earlier had found passenger fares have moved up just 28 percent over the last decade versus a 91 percent increase in freight rates, with passenger losses being compensated by squeezing the freight customers.
Railways’ freight traffic has been suffering due to myriad institutional and efficiency issues but hiking fares has made matters even worse for companies relying on this mode of transport. No wonder then that freight has moved over to truckers. The Axis Capital report quoted earlier notes that a 5-6 percent hike in passenger fares every year for the last 10 years would have garnered Rs 1.3 lakh crore versus the current passenger revenue loss of Rs 22,000 crore.
On the issue of declining freight revenues, an analyst from a Mumbai-based brokerage had said earlier that roads now carry 70 percent of all freight in India with Railways left to carry the remaining 30 percent. “This is lopsided and has happened because the Railways has a capacity constraint, it is unable to assure delivery timelines and is far more expensive than road transportation. A freight train runs at an average capacity of 25 km per hour! The Railways needs money to decongest tracks and improve its share in freight traffic”.
Bhanusali lauded Prabhu’s commitment to expand the freight basket, rationalize freight rates and offer a firm timetable for goods’ transportation to customers – all initiatives announced by the minister in his speech today. Ficci president Harshvardhan Neotia welcomed rationalization of freight policy and review of PPP framework, saying these would help attract private players.
“Commendable are the measures for improving quality of travel (both unreserved and reserved), cleanliness drive through additional 30,000 bio-toilets, stress on non-fare revenues through station redevelopment & monetizing land along tracks, greater participation of State Governments in implementation of railway projects through joint ventures,” he said.