Rail Budget 2013: Lalu, Mamata bills are still to be paid

Unusually for the UPA, the Indian Railways is one institution punching far above its weight in the current slowdown.

Even while the economy is going downhill, with the latest Central Statistics Office pencilling in a GDP growth of just 5 percent in 2012-13, the railways have logged 20 percent growth in revenues.

The paradox is this: if what happens in the railways is a proxy for the economy, why are we getting varying signals - amber on economic growth, and green for the railways?

The answer is very simple: the railways are doing better, thanks to axed Trinamool Congress Railway Minister Dinesh Trivedi’s decision to hike freight rates before the last budget. He lost his job not for doing this, but for raising passenger fares - Didi’s Holy Cow.

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By raising freight rates 20-25 percent before he actually presented the railway budget, Trivedi improved rail finances even while pushing down the economy’s speed. This is why: when freight rates rise, the economy slows if it can’t pass on the hikes to users fully. When passenger fares rise, it impacts the economy far less.

Trivedi’s successor once removed, Pawal Kumar Bansal, was far cannier when he announced passenger fares hikes in January this year to raise Rs 6,600 crore in a full year. We say canny, because raising passenger fares during the budget, when everyone’s eyes are on you, is politically riskier than doing it outside the budget.

Dinesh Trivedi may have survived had he done the opposite: announced his freight hikes in the budget, and increased fares in small doses through the year. All he needed was a cover: he could have called it fuel surcharge or safety cess. He would have had to wait for an accident to do the latter, but then rail accidents are not so infrequent in India.

The trend towards raising freight rates and not fares goes back to the ministry of Lalu Prasad Yadav in UPA-1. The man who ruined Bihar’s economy turned out to be an unusually smart Railway Minister and under him railway finances not only improved, but also generated huge surpluses that enabled him to play the perpetual populist: he almost never raised passenger fares during his five years as minister.

But the smartest thing Lalu did related to a freight trick that raised fares without formally raising them.

[caption id=“attachment_639647” align=“alignleft” width=“380”]  File photo of Mamata Banerjee. PTI[/caption]

What he did was simple: he knew that all railway cargo users tended to overload wagons by bribing railway staff. What Lalu decided was to institutionalise this illegality by telling his shippers: load as much as you want, but pay the railways for the extra load at same rates. Result: more freight earnings at same rates.

This had two advantages for shippers using the railways: they could load wagons to the brim, but the freight hike was lower than it would have been if they had to pay for it at the formal rates.

The reality is more nuanced: while the railways earned more by allowing shippers to overload the wagons, the costs were shifted to the future.

When you overload wagons, the resultant weight tends to damage the track network faster - but the damage is apparent only after a few years.

When the 2009 elections saw Lalu being replaced by Mamata Banerjee, she realised that railway finances were less rosier than Lalu painted them. Which is why she wanted to prepare a white paper on the railways. But she never got much political mileage from this move, and, in any case, she did little to rescue the railways. She made things worse by refusing to raise rates and pushed the bills to her successor.

This is why Dinesh Trivedi saw the need for creating a Special Railway Safety Fund and a safety cess in his railway budget.

The final bill for Lalu’s overloading, and Mamata’s refusal to do the right thing, had to be paid for by Trivedi, and he had nowhere to hide his freight hikes.

This is the ultimate reality: all railway ministers have tended to use freight as the cash cow, and spared passengers. But in the process, they make transport costs higher, and slow down long-term growth of the economy.

While Lalu was reaping his surpluses from overloading, the transport economy was slowly becoming a high-cost one, but the economy did not feel the pinch immediately it because the UPA was simultaneously refusing to raise diesel prices. This made road transport reasonably viable.

Now, however, the free ride is over. The UPA can no longer afford to subsidise transport costs by artificially depressing petro-fuel prices. Even Manmohan Singh agrees that “money does not grow on trees.”

So the railways were asked to fend for themselves. Last year, Trivedi bit the bullet. Towards the end of 2012, the rest of the UPA government followed suit by raising diesel and LPG prices and allowing oil companies to continue raising diesel prices in small monthly doses till the subsidy burden is ended.

For the railways, Lalu’s track damage bills are coming due. And the UPA’s larger folly of endlessly subsidising fuel prices is coming to an end. This will raise the railways’ fuel and power costs.

The downside is this: what’s good for the railways right now - higher fares and freight - is not good for the short-term growth prospects of the economy as transport costs rise.

Pawan Kumar Bansal has a tough task on hand: he can’t mindlessly raise freight rates when the economy is tanking; and he can’t raise passenger fares too much during the budget.

Perhaps the best he can do is a fudge: he can disguise fare hikes as fuel surcharge, and raise more from freight by reclassifying commodities into higher categories. This is because the railways have different rates for different categories of commodities. By reclassifying, say, steel in a higher category, he can raise more without actually raising the freight structure.

To put the railways on the path to long-term viability, he has to raise passenger fares more than freight, and also improve the railways’ efficiency. But one wonders if he can do either with elections round the corner.

In a couple of hours from now, we will know what he chooses to do. Over to you, Mr Bansal.