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Insights into Issues: Merger of Railway Budget into the General Budget

 

 


Insights into Issues: Merger of Railway Budget into the General Budget


 

The almost century old practice of presenting a separate Railway Budget ahead of the General Budget is to be dispensed with from the next financial year (2017-18) and the Railway Budget will be merged with the General Budget. The proposal has been cleared by the Union Cabinet.

Reasons for the aforementioned step:

  • The decision to present a separate railway budget was a mandate of the colonial era policy of British government on the basis of report by Acworth Committee. In 1924, when the first Railways budget was presented, the Railways entailed more funds than India’s expenditure on all other aspects of administration combined. Moreover, it was a tool to protect the foreign investment, particularly British investment in railways in India
  • Also, a separate Railway Budget is being dispensed with so that the Indian Railways need not pay the annual dividend to the Government of India on the budgetary support given each year, saving the financially stressed Railways about Rs.10,000 crore annuallymerger-of-railways-and-general-budget
  • In 1924, when the first Railway Budget was presented, the Railways entailed more funds than India’s expenditure on all other aspects of administration combined. So it made sense to present a separate Budget. That equation changed long ago, and now the Railways’ outlay is just 6 per cent of the total expenditure proposed in the Union Budget for this year. In fact, revenues from the domestic aviation business are more than the Railways’ traffic earnings. Nearly Rs.2.5 lakh crore has been planned this year as defence expenditure, but it found little mention in the Finance Minister’s Budget speech. Yet, the ritual of the Rail Budget has continued even as the economy opened up over the past 25 years. A key reason that it lingered so long is India’s fractured polity and the tendency of coalition partners to demand Railways as a juicy portfolio with its possibilities for populist posturing and patronage. Over the years, the Budget has been misused by politicians as a populist platform to enhance their own image
  • Railway Ministers will no longer need to conjure up fancy and often regurgitated promises about new, improved services for passengers without charging them the operational costs of reaching their destination. The pressure to hold commuter fares has skewed the Railways’ freight rates, year after year. Indeed, the change is already being felt as tweaking of tariffs outside the Budget has begun. Other instances are changes in coal freight and the introduction of flexible pricing on premium passenger trains.
  • No other Ministry has a separate budget and the practice exists in no other country today.
  • The NITI Aayog had suggested this merger as the Railway budget was being used to dole out favours by way of new trains and projects.
  • Bibek Debroy Committee has recommended discontinuance of a separate Rail Budget and it is part of the Prime Minister’s reform programme
  • Railway Minister Suresh Prabhu has said that the merger of rail and general budgets will not impact the functional autonomy of the railways but help in enhancing capital expenditure. It would help the Railways raise extra capital expenditure that would allow them to enhance connectivity in the country and boost economic growth.

Arguments against the merger:

  • One of the more publicised reasons for the merger is that it will free the Railways of the obligation of paying the annual dividend, as mentioned earlier. This is only partly true. The dividend is paid not only on the budgetary support extended during a year but also on the total “capital at charge” which includes the gross budgetary support (GBS) of previous years. By this merger, a “loan-in-perpetuity” is converted to a grant. Thus it is akin to a loan waiver, and loan waivers are granted to individuals or institutions in extreme financial distress
  • Budget is not merely a statement of allotment of funds to various projects and programmes, unlike other ministries, but comprises a fairly detailed performance review, physical and financial, of the previous year and prospects for the current Budget year. A separate post-Budget discussion in Parliament on the Railways, as indicated by the Finance Minister, is no substitute, as the focus most likely will be on allotments to various projects, not on financial performance
  • Railways is unlike any other Central ministry in size and scope: It is an operational ministry; it earns as well as spends, unlike other ministries that only spend. Its gross earnings (Rs.1.68 lakh crore in 2015-16) are among the highest for any Indian organisation, public or private; it has a staff strength (13.2 lakh) that exceeds that of the Indian Army; it fully meets the pension liabilities of its retired employees (13.8 lakh) out of its own earnings unlike other ministries; it follows an accounting practice, though not up to the standards of a purely commercial establishment, that has a number of features of a commercially-run organisation. So, if the Railways is to be treated like other ministries, the question that crops up is whether the government would fund the pension liabilities which are estimated to be about Rs.45,500 crore in 2016-17
  • Bibek Debroy committee recommendation to go for merger of railways budget with general budget was accompanied with a slew of other reform measures such as complete overhaul of the project financing architecture of the Railways involving ruthless weeding out of unviable/long-pending projects; comprehensive accounting reforms; separation of infrastructure and operations; and setting up of a rail regulatory authority. Pending these steps, each of which is a major project in itself, the move to give a hasty send-off to the Railway Budget is perplexing

Bibek Debroy Committee on restructuring railways:

 

  • Move to internationally accepted commercial accounting systems
    1. Easier to compute rate of return, will lead to more investment
    2. Help calculate the impact of various policies on different services
  • Adopt good practices as per the principles of transaction cost economies
    1. Focus on core areas, leave areas such as constructing schools for employees, cleanliness etc
    2. Outsource and subsidize if necessary
  • Streamline recruitment and HR process
    1. Currently through multiple channels. Streamline into technical and non technical recruitment
  • Decentralization
    1. Decision making authority for local projects to be transferred to DRMs and ADRMs
    2. Allow the division to retain a part of the revenue earned for BPR
  • Creation of Indian Railway Manufacturing Company
    1. Railway involved in various tasks such as manufacturing of coaches, berths, tracks etc
    2. Transfer the ownership of these companies to public sector SPV – IRMC which is independent of railway ministry’s control. Benefits will be
      1. Narrowing of scope leads to lesser risk and better management of risk
      2. Prevents parent company from bankruptcy
  • Easier to raise funds
  1. Autonomy in deciding salaries etc
  2. Problem in implementing this step is the huge no of people employed by railways in such factories who would be up in arms against any such move
  • Encouraging Private sector entry in running freight and passenger trains
    1. Currently Private sector not interested because of less capacity and they worry that tracks will not be allocated to them
    2. Recommended creation of a separate track holding company which will be neutral between railways and Private players
    3. Imp to note that government has allowed 100% fdi in all railway activities except for railway operations. Through THC we will encourage Pvt entry while ensuring that operation remains in the hand of THC
  • Independent regulator for railways
    1. Shift regulatory activities from govt to an independent regulator as the private sector will come only when there is a free and open access to infrastructure as well as fair tariffs without cross subsidization. Dispute resolution will also be an imp function of these regulators
    2. Railway regulatory authority of India with an independent budget and outside control of ministry as regulator for track and infra
    3. Railway board as regulator for operating trains which will be only for Indian railways
  • Social costs and Joint Ventures to bear them
    1. Creation of suburban lines through JV with state govt
    2. Tariffs on such lines are usually subsidized, burden to be shared on 50:50 basis
    3. Freight rate should be left to market , no cross subsidization
  • Same budget
    1. End system of gross budgetary support to railways and dividend payment by railways
    2. Merge railway ministry with transport ministry
    3. Investment from new sources as described above
  • Raising resources
    • Enhancing investment in railways. 5l cr investtent over the next 5 years announced in last year’s railway budget (2015-16)
    • Loans to be raised from international finance institutions like IFC and domestic finance institutions like IRFC
    • PPP streamlining
    • Access to long term finance source like pensions, insurance funds
    • Reducing operating ratio
    • Leveraging balance sheets of railway sector units within railways
    • JVs with state govt
    • Existing railway assets to be leveraged to raise resources through models like InvITs

 

Conclusion: 

The Centre needs to now seriously consider setting up an independent tariff regulator to depoliticise fares. New lines and trains should be determined by economic viability rather than the constituencies covered. Initiatives such as demand-driven clone trains must be deployed to boost earnings, and the Rs.37,000-crore tab on social obligations, including concessional ticketing, must be borne by the exchequer. The Railways’ accounts need to be cleaned up and made bankable. Scrapping the Rail Budget is a good starting point to fix the fading utility. Bringing it back safely on track will take a lot more doing, and undoing.