K. Balakesari

ONE more Railway Budget, has come and gone, accompanied by all the usual noises. It is strange, but true, that the direction which one of the largest public undertakings and the biggest organised employer in the country takes is decided by this annual exercise, which is as much a political statement as a financial review, reflecting the dual and sometimes conflicting roles of a commercial organisation and a public service, that the Indian Railways is called upon to play in this country.

While the politicians are generally concerned about what new Railway projects and new trains, that have a bearing on their constituencies, have been included in the budget, the general public's focus is on fares.

Everyone heaves a collective sigh of relief if the fares are not raised. And with the General Budget closely following the Railway Budget, the focus soon shifts to the former. Even the discussions on the Rail Budget in Parliament mostly focus on issues such as new lines, gauge conversion, introduction of new trains, train halts, safety and security — all important by themselves.

There is, however, hardly any debate inside or outside Parliament about the fundamentals of Railway finances. This is unfortunate, as the matter should really be of vital concern, not only to people's representatives and rail-users but also to all tax-payers, in general.

A closer examination of the figures accompanying the Railway Budget over the years reveals certain interesting, and sometimes disturbing, trends.

A separate budget for the railways in India was a sequel to the Acworth Committee Report, which recommended the separation of railway finances from the country's general finances, and this arrangement has been in place since 1924. Over the past eight decades, the format of the Railway Budget has remained more or less unchanged, having a distinct character combining the needs of a commercial entity with those of an arm of the central government.

Consequently, while it reveals a lot about the state of Railway finances, by the nature of the reporting format, it masks some vital facts and tends to create a sense of complacency.

Illusion of surplus

One such feature is the concept of `surplus'. A commonsense interpretation of surplus is that it is the equivalent of profit in purely commercial context. Surplus denotes funds to spare, after meeting all operating expenses and other payment obligations. In fact, a round of applause usually accompanies the declaration of a surplus' in the Railway Minster's budget speech in Parliament. But this feel-good factor is misplaced.

The figure is arrived at by subtracting from the gross traffic earnings, (i) the ordinary working expenses, (ii) appropriations to pension fund, (iii) payment of dividends to general revenues and (iv) appropriations to the Depreciation Reserve Fund (DRF).

While the first three items of expenditure/liabilities are generally non negotiable or obligatory, there is scope for adjusting the appropriations to DRF (having long term implications on over-aged asset replacements) in such a way that a 'surplus' is artificially generated and an operating ratio less than unity is achieved.

Index of financial health

An important index of the financial health of an organisation is how much funds it is able to generate internally (internal resource generation, or IRG) to meet the needs of asset replacements and developmental work. In the Railways context, the IRG is mostly made up of the appropriations to the DRF and Development Fund (DF).

Table 1 indicates the trend of these two indices as a percentage of the gross traffic earnings (M), taking the base year as 1997-98, when the effects of the implementation of the recommendations of the Fifth Central Pay Commission started being felt.

It is significant that while the gross traffic receipts (GTR) is (projected) to increase by 57 per cent in the BE of 2004-05 compared to the 1997-98 figure, the appropriations to DRF as a percentage of the GTR are set to drop from 6.6 per cent to 5.0 per cent.

Even in absolute terms, the appropriations to DRF fluctuated during this period from a low of Rs 1,155 crore in 1998-99 to a high of Rs 2,402 crore in 2002-03. Similarly the DF, which was 1.2 per cent of the GTR, has marginally increased to 1.6 per cent in BE 2004-05.

Considering that the absolute figures range from Rs 345-715 crore, this increase is hardly significant. In other words, in spite of GTR increasing more than 1.5 times during the past seven years, the total appropriations to DRF & DF will reduce marginally percentage-wise. The Railways has had to go elsewhere to fund its needs of replacements and development. The two sources are market borrowings and the general exchequer.

Market borrowings

Market borrowings of the Railways are channelled through the Indian Railway Finance Corporation (IRFC), a public limited company under the Ministry of Railways, incorporated in 1986.

Though expert financial opinion has been in favour of putting a cap on these borrowings at about Rs 2,000 crore annually to limit the long-term lease liabilities, in recent years market borrowings have invariably exceeded this limit and the lease charges payable are almost equal or even in excess of the amount borrowed, as indicated in Table 2.

This is not to imply that the Railways is in some sort of a debt trap, because the amounts borrowed from the market are used to create assets (rolling stock), which directly contribute to the revenue earning capacity of the Railways.

Even so, the matching figures of the borrowings and the annual lease payments are indicators of the increasing dependence of the Railways on costly borrowings from the market, rather than from internally generated resources, to fund not only new (additional) asset purchases but lately, even normal asset replacements.

Budgetary support

Although, traditionally, the Railways has depended heavily on contributions from the general exchequer (usually referred to as budgetary support, attracting dividend liability) to finance its annual plans including track renewals, explicit funding of asset replacements (apart from track renewals) through this route is a recent development.

Arising out of the recommendations of the Railway Safety Review Committee headed by retired Supreme Court judge Justice H. R. Khanna, a Special Railway Safety Fund (SRSF) was created in 200 1, amounting to Rs 17, 000 crore spread over five years of which, Rs 12,000 crore is to be funded as a grant from the general exchequer and the balance Rs 5000 crore, is to be met by the Railways, mainly through levy of a safety cess.

The main purpose of the SRSF is to clear the backlog of replacement of over-aged assets. Considering that appropriations to DRF have generally been of the order of Rs 2000-2500 crore in the recent past, the SRSF support through the general exchequer (amounting to Rs 12, 000 crore spread over a five-year period) amounts to a virtual doubling of the appropriations to DRF.

It is also a symptom of the inadequate appropriations made over the years to DRF. In fact, in the budget for 2004-05, if the contribution from the General exchequer to the SRSF, amounting to Rs 2,075, for replacement of over-aged assets is reckoned as an appropriation to DRF from the Railways' own resources, there will be a shortfall of Rs 1,202 crore, instead of an excess (`surplus') of Rs 873.0 crore, as projected.

From the above, it is obvious that the Railways' capacity to replace its ageing assets is becoming increasingly dependent on market borrowings (costly) and contributions from the general exchequer (unpredictable).

Expenditure trends

The trends on the expenditure front also provide some significant insights. Table 3 gives the trend of ordinary working expenses (OWE) and their critical components over the seven-year period from 1997-98 to 2004-05.

It is significant that while Ordinary Working Expenses (OWE) increased about 60 per cent, the expenditure on staff (on roll) — the largest component — has risen only by 44 per cent, whereas the pension liabilities have risen sharply by 82.4 per cent.

The total of these two components has risen by 53.9 per cent, which is marginally less than the rise in overall OWE. In contrast the expenditure on fuel/energy has risen by 77.8 per cent and that on lease payments (IRFC) by 79.9 per cent.

The relatively modest increase in the expenditure on staff (on roll) is the result of a deliberate policy of right -sizing of the workforce adopted more than five years ago. Consequently the number of staff on roll, which stood at 15.78 lakh as on March 31, 1998, has reduced by more than one lakh to 14.72 lakh as on 31 March 2003. This is perhaps a unique achievement for any government undertaking, which has not been adequately highlighted.

On the other hand, the expenditure on pensions, which has risen sharply, is an area beyond control, as the number of staff retiring is pre-determined, barring a small percentage of voluntary retirees. In short, a relatively modest increase in (on roll) staff expenditure has bucked the overall expenditure on staff, despite a sharp increase in the outgo on pensions.

Limits of staff reduction

The scope for controlling staff costs is, however, limited. Studies carried out some years ago, in the context of right-sizing, indicate that given the present organisational structure of the Railways and the operational improvements, rationalisation and modernisation plans that are already in place or can be foreseen, there is scope to reduce the staffing levels on the Railways to about Rs 10-11 lakh, as against the present level of about Rs 14.5 lakh.

Any significant reduction below that level is extremely difficult. If the present rate of reduction in staff is sustained, that level will be reached somewhere between 2010 and 2015. Thereafter, the OWE will start rising at a rate higher than the GTR, seriously compromising the viability of the system.

In fact, if the staffing levels are not kept under check or if there is another Central Pay Commission to contend with, that situation will be reached even sooner than 2010. The underlying message is that in the not-too-distant future, the basic viability of the system (GTR {gt} OWE) can be maintained only by a more rapid rate of revenue generation, on the one hand, and a ruthless pruning of loss-making services and projects, on the other.

Otherwise, a situation may arise when the OWE will exceed GTR and the Railways may have to seek assistance from the Central exchequer even to meet pension liabilities and may default heavily on dividend payments.

Hidden messages

of the Budget

The present financial predicament of the Railways needs to be viewed against the background of certain hard realities under which the Railways is required to function. With the quiet burial of the Expert (Rakesh Mohan) Committee Report on Indian Railways (2001), no fundamental organisational or financial restructuring of the Railways is likely. Consequently, the Railways will continue as an arm of the Central government in the foreseeable future, functioning both as a commercial entity and as a public service organisation. Unremunerative projects will continue to be sanctioned and executed and additional loss-making passenger services will still be introduced every year.

Against this background, the budget figures and trends of earnings and expenditure in the recent past, send out the following clear but sombre messages: