Rail Budget: A bold step by Dinesh Trivedi

If Railway Minister Dinesh Trivedi is not compelled to backtrack on some proposals, his Railway Budget for 2012-13 could be the one that checked the slide in Railways and stopped it being a drag on the economy.

For the Budget's proposals to play out, Trivedi will first have to survive the political storm caused by his decision to increase passenger fares after nine years by 16 per cent to 29 per cent, depending on the distance one has to travel.

Following Trivedi's speech, Vinay Mittal, chairman of the Railway Board defended the decision to increase fares by saying, "No system can function without having adequate funds."

What pushed Trivedi into the taking the decision was that he had to borrow Rs 3,000 crore from the finance ministry this financial year to invest in safety enhancement features.



Two things in Trivedi's Budget proposals stand out. The move to getting railway finances' back on track through fare increases and pushing for institutional mechanisms that would enhance safety of rail travel and partly insulate its balance sheet from the whims of the minister of the day.

Prevailing uncertainty in the political environment may undo some of Trivedi's plans, which probably explains the cautious reaction from industry.

"All that we have heard today is pretty noble -let's see how it pans out," Chandrajit Banerjee, Director General of industry lobby group CII, said in a mailed statement.

What might undo Trivedi's budget is an attempt to raise an additional Rs 6,500 crore to Rs 7,000 crore through passenger fare increases. The increases are about 5 per cent of the estimated gross traffic receipts of Rs 1.32 trillion in 2012-13. Given that Railways had to borrow money from the finance ministry in the current financial year to meet its safety needs, even small increases in revenue through an increase in passenger fares are important. In addition, they take a small step to neutralize the price the economy has paid to subsidize rail passengers.
Railway earns most of its revenue through moving coal for power plants, cement, petroleum products and iron ore. Freight increases have had to bear a disproportionate extent of increase in input costs. This, in turn, has slowly fed into the high inflation of the last couple of years. There has been no free lunch for the economy because railway ministers refused to increase passenger fares for years. An increase to shift the burden back to the rail passenger is a more transparent way of functioning.

The lopsided nature of railway pricing has also curtailed its ability to borrow from the market. In the current financial year, railway may not borrow more than Rs 15,000 crore, around 25 per cent lower than what it had originally planned.

According to Mittal, railway market borrowing depends on its ability to deploy funds in productive areas. That essentially means projects where the rate of return is not less than 14%, he added.

Given that there are limitations to how much railways can increase fares, it has no choice but to depend primarily on the union budget to fund its infrastructure investment. Therefore, in 2012-13, railway has announced that its plan to invest Rs 60,100 crore would come primarily through budgetary support of Rs 24,000 crore. Dependence on market borrowing has been scaled down to a more realistic level of Rs 15,000 crore.

What may not be realistic in Trivedi's proposals are the forecasts for 2012-13. A small improvement in railway finances is predicated on a 28 per cent increase in traffic receipts to Rs 1.32 trillion. "We are betting economic growth in the country will pick up in the current financial years," Mittal said. The projections seem to hinge on a best case scenario, a factor common to budgets over decades. Invariably, the projections go wrong and tend to undermine credibility of the whole process.

Even if Trivedi survives the immediate political storm without having to backtrack, he runs the risks of shooting himself in the foot by betting on a rather optimistic scenario. One can only hope the risks he has run do not short circuit the long-term improvements proposed.

-Additional reporting by Shweta Punj