Railways finances messy budget, but hope drowns experience

The expected did not come to pass and the Indian Railways has once again missed an opportunity to make this giant infrastructure operationally viable.

The rail budget speech has made the appropriate noises when it comes to stressing its importance in the  economy by saying that it was “at the crossroads” and even moots a national plan for this premier transportation network.

True, for the first time in the recent past, it has proposed a hike in fares across-the-board - a few days earlier, there was a stiff increase in freight rates — but this effort is no more than tokenism and it does very little towards rationalisation of the fare structure. Nor to restore to a modicum of financial health.

One look at the numbers reveals how wide the gulf between rhetoric and reality is.  In the current year, the net revenue is down to Rs7,144 crore from the budgeted Rs11,993 crore and is expected to zoom to Rs22,233 crore.

The operating ratio - that is total expenses as a proportion of total earnings — has leaped to 95% from the budgeted 91.1% but is projected to nosedive to 84.9%.

And the return on capital is slated to swell to a high of 12.1% next year though in the current year, it is envisaged to decline to 4.4% from the original estimate of 7.6%.

Thanks to the helping hand from the railway convention committee, which had agreed to reduce the rate of dividend to 5% from 6%, the railways’ dividend to the general revenues is also down to Rs5,652 crore instead of the budgeted Rs6,735 crore.

Judging by the speech of the railway minister, a significant turnaround is likely 2012-13, though nothing in the proposals justify this optimism. Can the gross traffic receipts spurt by nearly 28% to Rs132,552 crore, while in the current year, this was down by 2.2% to Rs103,917 crore from the budgeted Rs109,393 crore? It expects the total expenses to trail behind the total revenue so as to report a sizeable increase in net revenue. The arithmetic appears to be rather shaky.

But what takes the cake is the unrealistic assumption in the case of the key indicator - the operating ratio. Over the years, the railways has seen a spurt in this ratio so that, in a commercial sense, this departmental undertaking has been operating on wafer-thin margins, caught between the pincer of rising operational costs and the unwillingness of the railway ministers to shore up revenues by hiking fares and freight rates. 

Though the non-commercial character of this logistics giant is recognised, it has at least to earn enough to keep it viable and ensure a modest return on capital sunk into it.

This was not the case. But if the railway minister is to be believed, in the coming fiscal, the railways is set to turn the corner and the operating ratio would nosedive to as low as 84.9%.

Apart from the issues of efficiency at all levels, this improvement is predicated on the assumption that the freight traffic will rise by 30% and passenger traffic by over 5%.

Is a drop of over 10 full percentage points in the operating ratio envisaged in the budget realistic? Such a feat has never been achieved in the past during a single year nor indeed over the course of several years?

Not stopping at this rather Utopian goal, the speech speaks of reducing the operating ratio to below the 80% mark  by the end of the 12th Five Year Plan.

In fact, the railway minister claimed that his target was to achieve the best ever ratio of 74.7% reached in1963-64 before the end of the 12th Plan.

This is certainly a tall order. Even assuming this target is realised, it should be borne in mind that, in 2006-07, the accounting practices of the railways were changed in the treatment of leased charges so that the operating ratios since then were not comparable to those of the earlier years.

The impact of this change was dramatic in that, as per the old system, the operating ratio for2005-06 was 90.8% but which was only 83.7% in terms of the new accounting norms.  In other words, even if the operating ratio is down to 74.7% in a few years from now, it does not mean that the operational efficiency has improved to be on par with its performance during the early sixties.