Indian Economy News

Govt to invest Rs 1 lakh cr in Railways in FY16

New Delhi: Indian Railways will play a pivotal role in reviving economic growth in the country, Railway Minister Suresh Prabhu made it amply clear on Thursday. He announced an unprecedented increase of over 50 per cent in its proposed investments to over Rs 1 lakh crore next financial year while presenting the 2015-16 Railway Budget in the Lok Sabha.

What, however, he did not announce in his Budget speech was the proposed increase in railway freight rates for goods by up to 10 per cent through reclassification — a move that would fetch him an additional Rs 4,000 crore of revenue next year. Riding partly on this additional resource mobilisation effort, total goods earnings are expected to increase 13.5 per cent to Rs 1.21 lakh crore next year.

But passenger fares were left unchanged. Prabhu announced in detail many steps to give passengers a better travel experience, made it easier for the Indian Railways to give out contracts, desisted from announcing new trains, and announced a five-year investment road map and promised a vision for 2030. But the key takeaway was the Indian Railways’ centrality to Prime Minister Narendra Modi’s plan to kick-start the economy through ‘Make in India’.

Prabhu, who was parachuted into Rail Bhawan by Modi in November for precisely this, has budgeted for a Plan outlay of over Rs 1 lakh crore for 2015-16 to be used for the acquisition of locomotives, coaches and wagons, doubling of railways lines and their gauge conversion, and new lines. “Investment in the railways will have a large multiplier effect on the rest of the economy,’’ Prabhu, 61, declared in his speech. He invoked the prime minister four times in the hour-long speech.

The plan for a huge increase in investment outlay relies on “institutional finance” of Rs 17,136 crore (a new category of funding not tapped earlier), a hefty increase in the gross budgetary support to about Rs 40,000 crore (from Rs 30,000 crore for the current year), and Rs 17,276 crore of borrowings by Indian Railway Finance Corporation (an increase of over 46 per cent over the current year’s revised estimate). The remaining amount of about Rs 25,600 crore will come from the Indian Railways internal resources generation.

The institutional finance will be investments into railway projects through companies owned by the Indian Railways. For this, Prabhu said, low-cost long-term funds from insurance and pension funds, multilateral and bilateral agencies will be tapped. These, the MP from Rajapur in Maharashtra added, “have expressed keen interest in financing new investments” because “their time horizon is aligned with ours”.

After generating public-private-partnership investments of Rs 5,722 crore in 2014-15 (though Rs 282 crore short of the projection, this was the first year that the government made some headway on this much-debated head), Prabhu wants to raise another Rs 5,781 crore in 2015-16. But too many details weren’t forthcoming, except that Transport Logistics Corporation of India will be set up to provide end-to-end solutions at select railway terminals through PPP, and that the PPP cell in the railway ministry will be revamped to “make it result-oriented”.

Prabhu, who left the Shiv Sena to join the Bharatiya Janata Party in October, has budgeted for a surplus (excess of receipts over expenditure) of Rs 14,265 crore in 2015-16, which is almost double of Rs 7,278 crore in 2014-15 and almost four times of the Rs 3,712 crore recorded in 2013-14.

Because of this, Prabhu (pictured) has sharply increased the appropriations to the development, capital and debt service funds for 2015-16, which means he has created headroom for growth in the future.

The strong surplus projection for the coming financial year assumes growth of 15.28 per cent in total earnings (the bulk of it comes through passenger and freight movement). With no sign of a strong economic recovery, some may find this overambitious, but this is only a tad higher than the 13.84 per cent growth recorded in 2014-15 vis-à-vis 2013-14.

As a result, Prabhu has set the target for the operating ratio (share of total working expenses in gross traffic revenue) to improve from 91.8 per cent in 2014-15 to 88.5 per cent in 2015-16, the best in the last nine years. In 2007-08, when Lalu Prasad was the railway minister, the ratio had improved to 75.9 per cent.

The fall in diesel prices, made possible by the dramatic fall in global crude oil prices in the last seven to eight months, could also help the surplus. The fuel bill's contribution to ordinary working expenses fell from 30 per cent in 2013-14 to 27.4 per cent in 2014-15 and is expected to slide further to 25 per cent in 2015-16. Some analysts have projected that crude oil prices could crash to even $20 a barrel from around $60 now. Aided by the decline in diesel prices and with better financial management, helped the Indian Railways shave off Rs 2,178 crore from its total expenditure in 2014-15.

Cleverly, Prabhu has kept the focus on increasing capacity on existing sectors because it does not involve fresh land acquisition. In the proposed five-year investment plan (2015-19) of over Rs 8.56 lakh crore, over 23 per cent is earmarked for network decongestion.

However, many were left disappointed as his speech contained no mention of an independent authority for fares and freight tariffs. Experts have for long emphasised the importance of such an authority in order to put the finances of the Indian Railways on an even keel. For political gains, successive governments have kept fares low. To compensate, freight tariffs have been raised consistently. As a result, Indian tariffs are amongst the highest in the world, rendering Indian produce non-competitive. At home, this has caused the Indian Railways to lose freight business to the road sector.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.