The danger in Prabhu's Budget

Railway Minister Suresh Prabhu on Thursday articulated the Prime Minister's grand vision of modernising and transforming the Indian Railways by investing a whopping 8.5 lakh crore over the next five years on the expansion of freight and passenger networks, as well as other infrastructure. Skeptics immediately raised the question of where such massive funds will come from.

Indeed, there is nothing wrong in thinking big. But there needs to be a transformation in management culture to be able to act big.

To raise and spend $140 billion on the modernisation of the Railways over five years would mean organising funds of nearly $28 billion every year. Is the current railway management attuned to this scale of activity? Admittedly, we have talented railway engineers and managers. But even talented and experienced management personnel need special training to think and act on the scale outlined by Suresh Prabhu on behalf of the Prime Minister.

The Prime Minister thinks Indian Railways can be a key component of the infrastructure-driven double-digit GDP growth. Prabhu told me a while ago that the Railways alone can add 2 to 3 percentage points to India's GDP. Theoretically, this is possible.

A former Railway Board member told me that China built 10,000 km of high-speed rail track in the last ten years. This is more than the combined high-speed rail track that exists in the rest of the world.

Modi also has a pet project of setting up a high-speed network of rail tracks connecting the major metros of Delhi, Chennai, Kolkatta, Bangalore and Mumbai. Then there is the plan to launch a bullet train between Mumbai and Ahmedabad at a cost of 60,000 crore. Some of these plans are still being studied by expert committees.

The problem is that to implement such mega projects, the Indian Railways must transform its basic economics. A former Railway Board member, R Shivadasan, would like inject a dose of realism to the Modi vision. Mind you, Shivadasan left the railways in 2007 when its finances were in much better shape. Out of every 100 rupees earned through passenger and freight traffic revenues, the Railways spent 75 on working expenses like salary, fuel, maintanence etc. It still had 25% of its revenue left for spending on modernisation and asset replacement.

In recent years, over 90% of the revenues have gone towards working expenses and nothing has remained for modernisation. For 2015-16, Prabhu projects that 89% of revenues will go towards payment of salaries and other day-to-day expenses. Again, very little left for modernisation and massive expansion.

Shivadasan argues that there is no way the railways can sustain 8.5 lakh crore of funding – mostly borrowings – from outside agencies over the longer run. The debt-servicing obligations will kill the organisation.

A good part of the Railway modernisation has to be funded by internal resources or surpluses. For a utility with 1.6 lakh crores of traffic receipts , this should not be difficult provided its economics is set right.

At present, the Railways earns some 29 paise per passenger per kilometre but its break-even cost is about 53 paise per kilometre. Despite this deficit, Prabhu chose not to raise passenger fares, even for higher classes (like AC travel). With this kind of economics, it may be unwise for the utility to raise 8.5 lakh crore – mostly debt – for modernisation over the next five years. It could get into a debt trap. The Pay Commission recommendations in 2016, which will mandate higher salaries, would add to the debt trap.

By: M K Venu