The Modi government’s first Railway Budget announced a course correction for the financially crippled monolith and prescribed the obvious way ahead — change policies to attract private funds including foreign direct investment into all but “core operational areas”of the national transporter. But a lack of any plan of action or details on how exactly the government planned to do this unnerved markets.
The lower-than-expected increase in the size of the railways’ Plan outlay for FY15 to Rs 65,445 crore, despite a 25% increase to Rs 47,650 crore in budgetary funds, and the absence of of any signs of intent to corporatise the transporter was also a dampener for the markets, with the benchmark Sensex dropping over 500 points.
In his maiden budget speech, railway minister Sadananda Gowda portrayed the grim financial situation of the transporter: After meeting ordinary working expenses and dividend obligations, its surplus was a meagre Rs 3,783 crore in FY14. This means operating ratio last fiscal was a dismal 93.5%, 2.7 percentage points higher (worse) than what was seen in the February interim budget. (While the minister gave these figures in the speech, the budget documents weren’t updated and kept the revised estimates for FY14 as in the interim budget.)
The budget was vocal about FDI, said the “bulk” of new projects would be executed through the public-private partnership (PPP) model and, as expected, showed the government’s intent — by making a token provision Rs 100 crore — to set up a diamond quadrilateral of bullet trains connecting the four metros at an estimated cost of Rs 9 lakh crore (the first such line would be between Mumbai and Ahmedabad at a cost of Rs 60,000 crore).
A move to monetise the railway’s huge land assets was also evident, as Gowda said these would be digitised and GIS-mapped “for better management and usage”.
Prime Minister Narendra Modi called the budget “futuristic and growth-oriented”, while the Opposition flayed it for the rich. Industry and analysts welcomed the thrust given to the PPP model of funding.
Curiously, on a day India unveiled its plan to privatise most of its railway infrastructure, China came out with new guidelines on management of a fledgling railway development fund to attract private investment into its debt-ridden railway sector. China Railway’s China Railway Development Fund will reportedly last 15 to 20 years.
Given the recent 14.2% hike in fares that would rake in some R8,000 crore (Gowda said the hike “gave the railways much-needed respite, however, little it may be”), no further tariff increase was announced, but Gowda said the automatic six-monthly adjustment in tariffs to factor in fuel costs would continue.
Clearly, the slippage in controlling ordinary working expenses and the dip in traffic growth due to the economic slowdown have deprived the railways of the benefits of a fiscal consolidation drive initiated in the FY14 budget. The surplus for FY15 is pegged at a measly R602 crore, said the minister. The explanatory memorandum, however, says the surplus is R6,064 crore (total receipts is seen at R1.64 lakh crore and total expenditure at R1.49 lakh crore, dividend payout is estimated at R9,135 crore). Given a surplus of R602 crore, it is clear the projected appropriation of R5,663 crore to the Capital Fund would not materialise.
Gowda prudently refrained from announcing new projects, considering the huge backlog of existing projects (among the 676 projects sanctioned over three decades, the uncompleted 359 require a massive R1.82 lakh crore). Also, he projected only modest hikes in traffic growth — freight loading, for instance, is estimated to grow an annual 4.9% to 1,101 million tonnes.
Market borrowings for FY15 through Indian Railway Finance Corporation and was revised downwards to R11,790 crore from the interim budget level of R14,942 crore. The funds-starved railways did not provide anything to the revenue-creating Capital Fund in FY14 (the initial plan was to replenish the fund with R5,434 crore). There is also a plan to invest R4,000 core surplus funds with railway PSUs like Ircon in infrastructure projects.
But key to a brighter future for the railways — which boasts of a 1.16-lakh-km network, 2.4 core daily passengers, 13-lakh workforce and 1billion tonnes freight carriage annually — is creating a credible PPP model and FDI-led investments in areas like last-mile connectivity to por-ts, mines and power plants, suburban transport and high-speed train networks.
Stating that the endeavour was to pursue the PPP model in right earnest, the minister said: “It is our target that the bulk of future projects will be financed through PPP mode, including high-speed rail that requires huge investments.”
While presenting the budget, the minister was eloquent about how social service obligations have become a burden on the railways (the obligation amounts to half of the Plan outlay) and, later, speaking to reporters, he highlighted the need for private players to be confident about returns from railway ventures. “Private players have no faith... They feel if you invest in the railways there will be no returns. We will have to change certain policies to attract private players,” he said. Incidentally, the outlay for PPP in the FY15 budget is R6,005 crore, similar to last year's level.
Indicating the areas where private funds would be invited, Gowda said port connectivity projects through PPP mode of funding in sync with the Sagar Mala Project for port development would be given priority. He also stressed the need for private freight terminals and private investment in logistics. Station development is another area where private funds are expected and the plan is to develop at least 10 major stations as PPP projects, he said.
General Electric, Bombardier, Siemens and China's CSR are among the foreign firms that have evinced interest in Indian railway projects.
Stating that safety of passengers would be a priority (four railway accidents in the last three months cost 51 lives), Gowda said over R40,000 crore would have to be spent on track renewal and elimination of unmanned level crossings.
“The much-needed support for PPP as a significant source of investment capital is the backbone of providing the strategic financial headspace,” said KPMG.
Chandrajeet Banerjee, director general, Confederation of Indian Industry, called it a pragmatic budget.