FEBRUARY 14, 2020

By Naresh Minocha, Consulting Editor

INDIAN Railways (IR) is unable to check its slide-back despite herculean efforts. There is nothing concrete available to show that merger of Railway Finances with General Finances (RF-GF) in 2017-18 has changed IR's fortunes.

The merger drew curtains on tradition of presenting separate rail budget in Parliament. This has derailed exhaustive debate and analysis of railways' health that always followed presentation of the Rail Budget.

RF-GF integration, of course, fits well into NDA Government's bigger game-plan to disclose minimum on economy to avoid criticism. The decline in transparency in the performance review of Railways is, however, letting its problems fester and worsen.

IR's finances have been mentioned in Union Budget in the same way as the references to other departmental undertakings. The 'Railways Budget at a Glance' (RBAG) that used to a separate document under the Rail Budget Set of papers appears on 260th page of Expenditure Budget 2020-21 Volume I.

RBAG shows IR's net revenue at Rs 3811 crore under revised estimate (RE) for 2019-20, which is 57.81% lesser than Budget Estimate (BE) of Rs 9035 crore. RE is slightly higher than actual net revenue of Rs 3773.86 crore earned in preceding year.

Of the net revenue of Rs 3811 crore, Rs 1311 crore has been appropriated to Development Fund and balance Rs 2500 crore to Rashtriya Rail Sanraksha Kosh (RRSK).

The then Finance Minister Arun Jaitley created RRSK in 2017-18 to finance critical safety works. He had proposed this Rs 1 lakh-crore to be financed over five years. The Budget for 2017-18 allocated Rs 20,000 crore to RRSK as seed money.

Appropriation to RRSK was whittled by 50% to 2500 crore in revised estimate from BE for 2019-20. There has been no appropriation of money to another account named Railway Safety Fund. Appropriation to Depreciation Reserve Fund (DRF) was also reduced.

IR has not earmarked even one paise for capital fund in BE for 2020-21. The CF allocation is zero under RE 2019-20 as compared to Rs 3035 crore provided for in BE 2019-20. CF was created in 1992-93 to fund part of the requirement for capital works. The fund remained operative till 2001-02.

The Government uploaded pruned set of IR's annual budget documents on IR website four or five days after the presentation of Union Budget for 2020-21. The documents show that Railways is unable to reverse its downslide as gauged from its operating ratio (OR).

OR is the foremost indicator of IR's performance. It is ratio of working expenses (excluding suspense but including Appropriation to Depreciation Reserve Fund and Pension Fund) to gross earnings. OR of 100% means IR spends Rs 100 to earn Rs 100. It is like running on treadmill to stay put. IR should ideally be below 80% to generate reasonable surplus for long-term health of IR.

The 2019-20 RE for OR is 97.46% against BE of 95%. Judge this performance by reckoning the fact that the Railways Minister Piyush Goyal had repeatedly pitched 90% OR as the target for 2019-20 in IR's internal meetings. RE of OR is higher than previous year's actual OR of 97.3%. The BE for OR for 2020-21 is 96.28%.

The possibility of IR failing to achieve this target can't be ruled out. It is here apt to factor observations made at periodic internal meetings.

At a meeting of Principal Financial Advisers held on 22th October 2019, it was noted that repayment of extra budgetary resources from next year will further burden the railway finances. Therefore, tight control over expenditure will be required through robust internal checks.

Additional Member (Finance) opined that there is need to ascertain cost of service. Costing exercise should be taken up by Railways and shared with Zonal railways.

During the deliberations, it was noted that IR might not be able to meet fully the principal component of lease charges due to internal resources position.

Whether RE is an outcome of creative accounting would be known when Comptroller and Auditor General (CAG) submits its report on Rail Finances for 2019-20 a year later.

IR has not yet reformed its accounts that are simple and easy to understand. This issue cropped up at IR conference on 'Rail Sangosthi - Next Generation Reforms' in which several middle-level officials made presentations during December 2019.

An official from Northeast Frontier Railways pointed out that "very complicated accountal system in Indian Railways which is not being well understood by fund controlling officers i.e. executives".

Another official from South Western Railway suggested that IR should "expedite the completion of accrual accounting implementation across Indian Railways".

As put by Bibek Debroy Committee on rail reforms in its 2015 report," It is not yet clear where the IR stands financially, in the absence of accounting reforms. This committee opines that once the accounting reforms are in place, it should be possible to clearly specify the costs to IR of various activities "

Reverting back to OR, the failure to achieve OR target for 2019-20 is due to shortfall in revenue receipts and rise in Ordinary Working Expenses (OWE) as compared to respective BEs.

Among 18 rail networks (17 Zonal Railways & Metro Railway-Kolkata), 11 entities have OR of more than 100%.

The worst performer is Metro Railway-Kolkata with OR of 255.9%, surpassing both BE OR of 251.8% and actual OR of 244.9% in 2018-19.The best performer is East Coast Railways with OR of 50.3% in 2019-20 RE, which is 0.1% better than BE and the actual OR of 52.3% attained in 2018-19.

It is here pertinent to cite CAG's report on railways finances for 2017-18 presented to Parliament in December 2019.

The Report says: "The steadily declining performance of Indian Railways is reflected in the Operating Ratio (OR) of 98.44 per cent which was the worst in the last ten years. Indian Railways would, in fact, have ended up with a negative balance of Rs 5,676.29 crore instead of surplus of Rs 1,665.61 but for the advance received from NTPC and IRCON. Similarly, OR would have been 102.66 per cent".

IR's revenue surplus has been falling since 2016-17 under the burden of Sixth Pay Commission. During the year 2017-18, the net revenue surplus decreased by 66.10 per cent from Rs 4,913.00 crore in 2016-17 to Rs 1,665.61 crore in 2017-18.

According to CAG, the factors mainly attributable to meagre surplus were increase in working expenses (8.14 per cent) and negative growth rate of sundry earnings (16.20 per cent). Staff cost including pension payments constituted the bulk of working expenses.

It is not for first time IR's finances have been hit hard by Pay Commission's award. In FY1993–1997 its OR was around robust 75%. However, over the next four years (FY1998–2001), OR deteriorated to 87–93% due to 33% average hike in wages after implementation of recommendations of Fifth Pay Commission. IR had then launched an initiative to reduce its staff strength by 2% beginning 2002-03.

Presenting the IR Budget Speech 2016-17 on 25th February 2016, Railways Minister Suresh Prabhakar Prabhu saw the writing on the wall. He observed: "These are challenging times, may be one of the toughest. We are faced with two headwinds, entirely beyond our control; tepid growth of our economy's core sectors due to international slowdown and the looming impact of the 7th Pay Commission and increased productivity bonus payouts".

The next year witnessed unveiling of RF-GF merger. In his budget speech presented on 1st February 2017, Mr. Jaitley had stated: "the merger of the Railways Budget with the General Budget is a historic step. We have discontinued the colonial practice prevalent since 1924. This decision brings the Railways to the centre stage of Government's fiscal policy and would facilitate multi modal transport planning between railways, highways and inland waterways".

Parliament's Railway Convention Committee (RCC) has reviewed dozen parameters that formed the basis of this merger. In its 31st report on 'Merger of Railway Finances with General Finance- Issues and Challenges ' presented on 11th February 2019, RCC observed: "one of the important parameters which is yet to be followed is the gradual working out of a suitable subsidy sharing mechanism to be advised by the proposed Railway Regulatory/Development Authority".

RCC has advised the Government to expedite setting of Railway Development Authority (RDA), which could work out principles of sharing social costs currently borne by IR.

According to RCC, Finance Ministry has not yet accepted IR's suggestion to demarcate between the commercial and social part of the Railway activities and reimbursement of the Social Service Obligation.

Says the Report, "It is really a matter of serious concern for the Committee that on one hand the Railway Budget has been merged with the General Budget due to inadequate commercialisation of the Railways while on the other hand no demarcation between the Railways' commercial and social activities has been made nor any decision has been taken to reimburse the Social Service Obligations of the Railways".

It adds: "In other words, indecision regarding a clear-cut demarcation and reimbursement of social costs might have led to inadequate commercialisation of the Railways, notwithstanding Railways' own performances".

RCC has noted that the Railways is preparing a National Rail Plan for its overall development.

The plan should not just be a dossier of projects and investments required to implement them. The plan should be driven by reform proposals -spread across many reports prepared over the years.

An obscure report that merits attention for improving IR's financial health is the one submitted by Committee to Examine Requests for Creation of New Zones and Divisions received from 2014 to 2017.

The Committee suggested: "Time has come to seriously consider reducing the number of zones and divisions to a more meaningful and manageable level. This is also pertinent in view of advent of advanced communication technologies resulting in greater control over train operations and other allied activities related to it, such reduction will also ensure removal of artificial zonal/divisional boundaries which tend to hamper smooth train operation and will avoid indulgence in unhealthy competition amongst zones/divisions for scarce resources".

The Committee thus recommended sanction of a detailed study on proposed merger of zones/divisions. If such a study has been done, then IR should put it in public domain. This would help stem demand from regional lobbies backed by MPs & MLAs for creation of new zones and divisions.

All said and done, IR should be freed from burden of populism whose cost should be borne explicitly by the exchequer. IR should be encouraged to operate as pure-play commercial entity providing world-class logistics in multi-modal format of transportation.