Finally, on road to fiscal redemption

For the first time in many years, the railway budget this year brought a breath of fresh air. Instead of expressing platitudes about poor men and poverty and requirements of virtually free rail travel, the budget this time talks about Indian railway network future and a vision for future growth.

There are certain redeeming features of the budget presented by Pawan Kumar Bansal who is so new to his ministry. These should help bring about a qualitative shift in the functioning of the Indian railway system which is needed at this point.

Firstly, the railway minister had introduced an element of free market in fixing railways’ fare and tariffs. The new railway minister saw some merits in Trivedi’s proposals and has liberally adopted those measures.

A major such borrowing is the concept of a ‘fuel adjustment component’ (FAC) which has been adopted by Bansal and this will for sure introduce an element of the market in fixing the railways’ freight and fare. As the fuel price will vary, these could be factored into railway freight and fares through the new component.

Maybe, this is just a beginning. The minister says the adjustment would kick in  twice a year. Given the fluctuations and volatility in oil prices, maybe, in future the adjustment could have to be made more frequent. The issue is that the service provider should not absorb price volatility.

Secondly, the minister has emphasised the financial restructuring of the railways and the need to introduce sound ‘economic principles’ in its operations to provide value for money. Bansal emphasised on railways’ financial independence.

He has refrained from placing supplementary demands for railways, he has constituted a special debt fund to provide for meeting the debt servicing liabilities for the dedicated freight corridor projects/ loans have been taken from JICA and World Bank for these ambitious projects. In this context, it is important to take note of the minister’s announcement to set up a special high level institute for studying railway finances. He announced setting up the Indian Railways’ Institute of Financial Management at Secunderabad. Large scale finance has become highly skilled and technical. Structured finance, leveraging, raising borrowed funds from global markets are extremely skilled activities and the specialised training to railway finance officers should be extremely useful in future financial management of the railways.

Thirdly, recognising that freight earnings are the mainstay of the railway finances, the railway budget has sought to introduce some innovations to attract more freight into the railway system. Thus, one of the proposals is for starting 10,000-tonne load trains and as part of this, he proposed to introduce 1.5 kilometres long trains and 49 long loops to accommodate these long trains.

Indeed, the railways’ had recently held a global seminar on freight movements by railways in the capital recently where railway experts from countries operating major railway networks had participated. The issue of heavy load movement on the railways was discussed in details and necessary infrastructure building was discussed. It is good that the minister had so quickly followed up on the deliberations.  

In a way, the railway budget this time is just a culmination of some of the steps the new minister had already taken. He had announced some hikes in fares and freight rates already. That had taken care of the requirements of the higher costs of operating services. The minister had deferred fresh hikes for now. However, these should kick in after a while from his fuel adjustment component revision from April this year.

This is a job well begun though not taken to its full length. The lack of a balance between fare and freight had been introduced over the years because of hikes in freight rates while passenger fares had been kept almost frozen. No service should be at less than costs. Thus, passenger fares should as much cover costs and freight rates should yield adequate returns.

These are some of the pending restructuring that the minister should hopefully undertake in the coming years. (IPA)
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