Rail Budget 2016: Why borrowing may not be the best bet to boost Railways?

Railway Minister Suresh Prabhu is broadly expected to increase capital outlay in Rail Budget 2016 by 20-25 percent year-on-year (YoY) to Rs 1.25 lakh crore from Rs 1 lakh crore announced in the previous Budget. However, there are worries Prabhu will indulge in excessive borrowing to get this funding. The obvious question then is — Is this the right way forward? Especially, in light of the fact that Indian Railways' earnings has slipped to Rs 1,36,079 crore as against a target of Rs 141,416.05 crore, a decline of 3.77 percent. The Railway Minister will be presenting the Budget tomorrow.The reason why Prabhu may have to borrow excessively is because he cannot obviously raise freight tariff given the weak demand scenario (also losing traffic to roads). Coming to hiking passenger tariff, needless to say such a move will be politically unpopular. Despite this, newpaper reports suggest that Prabhu is planning to increase passenger fares by 5-10 percent in the upcoming Budget. But that too may not amount to much. Hence, borrowing and a thrust on PPP projects!Indian Railways (IR) had signed an MoU with LIC in March last year for financial assistance of Rs 1.5 lakh crore over the next five years for construction of new lines and route electrification. It has already received Rs 2000 crore from Life Insurance Corporation (LIC), the first tranche of its financial assistance for investment in 50 projects. Prabhu believes massive investments are required for the development of railways in the first five years. In fact, he says, around Rs 8.5 lakh crore is required for developing the railways. He hopes to get this massive amount from institutions such as World Bank and LIC.Perhaps, he has taken a leaf out of the recommendations of the BK Committee report on Creative Financing to spruce up infrastructure enhancement. The committee had suggest a two-pronged approach: firstly, through public investment and market borrowings and, secondly, through private investment. The Committee had estimated that Indian Railways can generate Rs 3,29,800 crore by way of creative financing in order to supplement its investment plans during the 12th Plan. "This would unlock and release committed resources of about Rs 1,36,500 crore for other railway projects which are not amenable to such means of financing," the report states.

While theoretically it sounds great, many are wondering how Prabhu intends to pay these institutions back. Former railway minister Dinesh Trivedi too had sounded a strong note of caution. He felt the railways can just as easily fall into a debt-trap and go the Air India way if Prabhu continues to bank too much on borrowing. Trivedi based this on a parliamentary panel report, which came out in April last year and was authored by him. It said there has been a fall in revenues from both freight operations and passenger side, leading to a situation where operating ratio (OR) may soon shoot above the 100 mark. "Unfortunately, it (railways) is again under a severe financial crisis. Its OR — money spent to earn Rs 100 — has deteriorated to 93.6, the ratio of net revenue to capital is 5.6 percent and the surplus was only Rs 3,740 crore in 2013-14," the report stated.However, soon after, a Ministry of Railways press note dated July 30, 2015, had said this is the first time in the last seven years that OR has surpassed the budgeted target in a year. "The provisional accounts indicate an OR of 91.3 percent which is an improvement over the Budgeted target of 92.5 percent," the release had said.Despite this, Metro Man E Sreedharan too concurred with Trivedi's views and said: "Railways cannot survive on borrowings. That is the tendency right now. Borrow from LIC. Borrow from the World Bank. They have to return this money. The railways should mobilise resources and generate income. Passenger fares have to be increased and operating expenses reduced."Talking about the LIC loan, Trivedi too had said it may not be a good idea to get carried away by a provision for a moratorium. "When you are borrowing from LIC and paying 9 percent, there could be a moratorium now, but after the moratorium you need to pay back," he had said. 

However, Sreedharan added that Prabhu has started well but the pace has to increase. "Borrowings are okay for the short term but there has to be a proper strategy to pay them back. The system cannot survive on that." He too stressed on the need to take unpopular measures or decisions. "Fares need to be increased. Staff strength needs to be reduced. Railways are over-staffed. These are unpopular measures but it is a question of survival of the system," he added.