Survey of Indian Industry 2003 brought out recently by The Hindu carried an article contributed by Shri P.V.Vasudevan, ex-FC(Railways), entitled Railways - Priorities in investments. The same is reproduced below:

Priorities in Investments

P.V.Vasudevan

THE NATIONAL Rail Museum, New Delhi was the venue of celebrations on April 15, 2002, on the eve of the Indian Railways entering its 150th year of service to the nation. The Prime Minister unveiled a Mascot, Bholu the guard, the sincere, responsible and cheerful, symbol of a massive organisation that carries day after day, more than 10 million passengers and a million tonnes of freight. The 14,000 odd trains, including over 8,500 passenger carrying trains, run their course with fair normality, except for the occasional startling accident and the somewhat more regular infractions of the timetable.

There is constant effort to serve the public, the nationwide computer network being a shining example; but there are many shortfalls too vis-a-vis the expectations of the public. On the whole, the system performs well, and there is apparently nothing to suggest fundamental flaws in it. But the fact is that for some years past, Indian Railways, the lifeline of the nation, is in a grave predicament.

The topmost problem for the Railways is to find the funds for even essential investments. The proximate causes are shrinking of Central budgetary support and, limited scope for internal generation of resources, its own tariff policies, the persistent fall in the share of rail in land transportation, huge surplus staff, the impact of the Fifth Central Pay Commission’s recommendations on wages and pensions and the growing number of pension beneficiaries.

Under such limitation of resources, prudence would dictate carefully prioritised investment planning. On the contrary, a large chunk of the resources has been thinly spread across several hundreds of works, including a huge shelf of new line and gauge conversion projects with little prospect of early completion. Line capacity is perennially short of requirement on the dense corridors like the ‘Golden Quadrilateral’ and its diagonals where additional traffic of both freight and passenger is pressing, speeds do not improve despite highpower locomotives and improved rolling stock, these expensive assets are therefore underutilised, no credible efforts can be made to capture additional traffic, and safety is a nagging concern — in short, a debilitating constraint on the vital arm of the transport infrastructure, just when it is expected to make the most of the opportunity arising from the economic reforms of the last decade.

Expert Group recommendations

Any appraisal of the Railways at this juncture must refer to the report of the Railway Expert Group (July 2001) set up in 1998, with Dr Rakesh Mohan (who had earlier prepared the India Insfrastructure Report) as Chairman, and members from the corporate industrial and financial sectors, government ministries and the Railways. Based on wide-ranging studies, it compels attention to various weaknesses of Railway policy and practice, structure and mindset. The report notes that the Railways is on the verge of a financial crisis, and suggests fundamental changes in order to face the emerging competitive pressures. The group considers that the Railways has to make a deliberate choice; it can opt for the Strategic High Growth scenario (elaborated in the report) that has the potential to double the rate of growth, and emerge as a strong, modern system or, by default, allow this fine institution to wither.

Investment in the transport sector, including the Railways, was a priority in the initial phase of India’s planned development. In the first three five-year plans its Railways received adequate budgetary resources for their strengthening and modernisation, to facilitate industrial and economic development. Budgetary support remained high till the end of the Sixth Plan but priorities changed thereafter. The following tables bring out the decline of budgetary support for the Railways and its falling share in the total outlay for the transport sector.

Investment Trends

In terms of revenue performance, the Railways enjoyed fairly satisfactory results during the first three Plan periods. But in the twenty years that followed, it defaulted several times on payment of dividend to general revenues and resorted to loans from general revenues for the Development Fund (used for financing unremunerative but essential works, passenger amenities and staff welfare).

The Sixth Plan period was particularly distressing for the large size of the shortfalls that occurred as well as the highest-ever operating ratio of 96.3 per cent till then (signifying a high level of revenue expenditure out of receipts, leaving very little for dividend and development works). In the Seventh Plan period (1985-90) the Railways achieved a remarkable turnaround under the able direction of late Madhavrao Scindia. Freight output in tonne-kilometres jumped from 173.6 billion to 229.6 billion, chiefly on account of the long haul movement of bulk goods in block rakes. At the same time, there was fairly balanced increase of tariffs of both passenger and freight traffic. The year 1989-90 was significant for the raised level of freight tariff but, perhaps unintended at the time, it would be the starting point of a relentless trend of freight increases over almost a decade. Indeed very good financial results were achieved; the outstanding dues to the general revenues in the Deferred Dividend Liability Account and the loans taken for the Development Fund were wiped out, balances in the Railway Funds increased and the operating ratio came down well below the figures in the Seventh Plan period.

Diversion to roads

Ironically enough, in these years of relative prosperity, input to the Depreciation Reserve Fund fell below the norm recommended by the Railway Reforms Committee (1984) and implemented in the Seventh Plan period. The high freight charges led to a steady loss of traffic to the roads, aggravating the trend that had set in after the deregulation of trucking in the 1980s. The point-to-point block rake, a notable reform in an earlier context and still generally valid, proved to be an additional cause, because many customers needed some flexibility which was not forthcoming. Freight other than bulk commodities, referred to as ‘Other goods’, also required a different approach and declined because it was not taken. Delays and losses in transit added to the downturn. Returns from the growing levels of passenger traffic, accounting for nearly 60 per cent of the transport output, were wholly inadequate to meet its costs, mainly because of a continuous policy of tariff restraint, with only occasional and hesitant departures from it. On the whole, the receipts and outgo of internal resources rested on a fragile equation. Railway finances became highly precarious.

The Ninth Plan marks a tempestuous phase for Railway finances. The first year, 1997-98, saw the implementation of the Pay Commission recommendations which put up staff costs by a third. The impact continued into the next year when, by a disastrous coincidence, freight traffic dropped 29 million tonnes below target,nine million below the previous year’s loading. Table III depicts the distressing features.

Total Plan expenditure in the Ninth Plan period is likely to be close to Rs. 46,400 crores in nominal terms, as compared to the approved outlay of Rs. 45,413 crores at 1996-97 prices. Clearly there is a significant shortfall. This, despite increasing budgetary support, is basically the result of a serious decline in internal resource capacity, as the Table III shows.

The final year of the Plan has brought in two types of significant additional assistance from general revenues — a 12.5 per cent share of the cess on diesel and petrol for the Railway Safety Fund and a short term contribution (spread over five years) of Rs. 12,000 crores to the Special Railway Safety Fund; the Railways is supplementing it with a safety surcharge on passenger fares to yield Rs 5,000 crores in five years.

New initiatives

The Railway budget for 2002-03, the first year of the Tenth Plan period, attempts to correct past anomalies of tariff and, with higher support from the general exchequer, aims at an outlay of Rs. 12,330 crores. But there is a long way to go and the outlook is unclear. That the joyless prognosis of the Railway Expert Group has made an impact is recognisable in the "Status Paper on Indian Railways — Issues and Options", May 2002. It outlines, inter alia, the initiatives taken to rationalise freight and fare structures so as to arrest diversion, improve profitability, reduce cross-subsidisation; recapture traffic lost by excessive adherence to the block rake dogma; reduce staff strength; use Information Technology for improving the customer interface; involve State governments and the private sector in the funding of major projects; strengthen the high-density network, the Golden Quadrilateral and its diagonals; use new technology to enhance efficiency, safety, speed of freight trains, etc. With the commitment and confidence expressed in the Minister’s foreword, these measures must help.

Many ‘issues’ have also been posed for wider debate, some of which have been examined in the past. A charter for the relationship between the Railways and the Central Government has been proposed by the Railway Capital Restructuring Committee. It is opportune to put in place such a document, with modifications to suit the foreseeable future, so as to facilitate pursuit of the declared corporate objective " To be a modern railway system with sufficient capacity to meet the country’s transport needs for passenger and freight traffic, based on an optimal inter-modal mix, and to provide this transportation at least cost to the society while maintaining financial viability of the system."

It is worth recalling here the situation after partition in 1947. The major concern of the Railways was "the problem of rehabilitation and replacements created by the post-1930 economic depression, neglected by the conditions of the war years and accentuated by the special features of partition". Five to eight times the normal level of annual replacement of rolling stock had to be done. Track had been maintained and renewed only for the minimum requirement of safety, whereas the intensity of wartime traffic had caused abnormal wear and tear. Signalling and Telecommunication equipment were breaking down. These operational deficiencies which manifested themselves all at once necessitated the adoption of heroic measures.

Partition had also profoundly influenced the pattern of traffic, availability of workshop capacity and trained manpower. Line capacity and yard capacity problems demanded immediate solution. There was rapid economic recovery and traffic volumes developed at an unprecedented pace. The Government of the day recognised that "further deterioration in the transport system could not be tolerated, whatever may be the financial resources available to the Central Government." (Emphasis provided).

Steps were taken to bring about a new ‘convention’ for the relationship of railway finance and general finance that made it possible to provide adequately for rehabilitation and accelerate other developmental projects. Decisive action enabled completion of important projects like the Assam rail link, a rail link for the Kandla port, etc. The unpopular measure to raise resources by a revision of passenger fares was also adopted in view of the financial situation of the country.

The foregoing account, taken from the "White Paper on Indian Railways"(1952), shows the striking similarity in the state of the Railways five decades back and now. The lessons from the past are there to be adapted and followed. Fortunately, the Railways is now well off in rolling stock; only improvement in line capacity and a truly commercial orientation are needed to win back freight traffic. The revenue potential of passenger traffic has to be fully realised quickly, making up for lost time. Investment, from whichever source, in the so-called "socially desirable projects", must wait until fluidity of traffic is assured and positive safety enhancement measures through modern technology are implemented.

Above all, a higher priority for investment in Railways by the Central Government would lend the necessary impetus to strengthening the system at this crucial juncture, before private investors can confidently participate. It was in 1969 that the Railways first ran the prestigious Rajdhani Express at a speed of 130 kmph. Is it too much to expect that fifty years thereafter the country will have a high-speed network of contemporary international standards?

P. V. Vasudevan

III: Trend of Railway finances
	1996-97	1997-98	1998-99	1999-00	2000-01	2001-02
Staff costs Including pension	10145 100	13664 135	15787 156	16479 162	17861 176	18760 185
Gross traffic receipts	24319 100	28589 118	29619 122	32939 135	34880 143	37720 155
Ratio of (1) to (2) %	41.7	47.8	53.3	50.0	51.2	49.8
Operating ratio %	86.2	90.9	93.3	93.3	98.3	96.6
Railway fund balances	3370	3564	1253	149	359	994
Plan expenditure (net)	8310 100	8239 99	8857 107	9057 109	9395 113	10857 131
Internal resources	4462 50	3452 42	3455 39	3550 39	3229 34	2666 25
Extra budgetary resources %	2383 24	2795 34	3217 36	2919 32	2897 31	2753 25
Budgetary support %	1465 18	1992 24	2185 25	2588 29	3269 35	5438 50
Note: Financial figures in crores of rupees. Index value in brackets.

I: Resources for the Railways Investments
Plan/ Period	Outlay (Rs. Cr.)	Internal Generation (Rs. Cr.)	% of Plan Size	Market Borrowing (Rs. Cr.)	% of Plan Size	Budgetory Support (Rs. Cr)	% of Plan Size
I	422	280	66	-	-	142	34
II	1043	467	45	-	-	576	55
III	1685	545	32	-	-	1140	68
1966-69	762	320	42	-	-	442	58
IV	1428	397	28	-	-	1031	72
V	1525	384	25	0	0	1141	75
1978-80	1251	316	25	0	0	935	75
VI	6585	2783	42	0	0	3802	58
VII	16549	7089	43	2520	15	6940	42
VIII	32306	18832	58	6161	19	7313	23
IX prov	46405	16352	35	14581	31	15472	34

II: Plan Outlay for Transport Sector and Railways
Plan	Total Outlay (Rs. Crore)	Transport Sector	Railways (Rs. in Crore)	Transport Sector Outlay as %age of total Plan Outlay	Railways Outlay as %age of Total Plan Outlay	Transport Sector Outlay as %age of total Plan Outlay
Upto 4th	30988	6039	3200	19.5	10.3	53.0
5th	28991	4078	1523	14.1	5.3	37.3
6th	109292	13841	6555	12.7	6	47.4
7th	218729	29548	16549	13.5	7.6	56.0
8th	434100	53966	27202	12.4	6.3	50.4
9th	859200	121037	45413	14.1	5.3	37.4
Source: Status paper on Indian Railways : May 2002