Railway Budget – A Requiem: Vivek Sahai, former Chairman, Railway Board & Fellow, Observer Research Foundation

A retrieval of the railways’ financial health is quite within reach, if due focus is laid on the core sectors of freight operation and enhanced productivity of assets

The Indian Railways (IR) is a behemoth employing 1.3 million workmen, lifting more than 1 billion tonnes of freight annually and carrying 24 million passengers in its 12,000 passenger trains each day. Only a few railway systems in the world match or outdo these indices, but one factor that no other railway had matched was that the Indian Railways had its own budget – to be presented every year on the floor of the Parliament. At least this was the case until last year. 2017 will go down in history as the first year when the Rail Budget was subsumed in the General Budget.

A separate rail budget has its genesis in the recommendations of the Acworth Committee of1920 when its chairman, Sir William Acworth, pointed out the need for unified management of the entire railway system and inter alia, recommended that “the Finance department should cease to control the internal finances of the railway, that the railway should have a separate budget of its own….”

This was considered necessary because the railway’s revenues far outstripped the general revenue and had the potential of masking small yet important aberrations in the general budget of the Government of India, if presented together. A ‘separation convention’ on September 20, 1924 dissociated the railway finances from the general finances.

In 1947, when independence was achieved, railway revenues were still 6% more than the general revenue (see table). The Railway Convention Committee headed by Sir Gopalaswamy Ayyangar recommended, “separation of Railway finances from General finance should continue”. A resolution to this effect was approved by the Constituent Assembly on December 21, 1949. The revised convention was to be effective for a period of five years starting 1950-51, but continued for 66 years, just as a few other constitutional provisions for language and reservation have enjoyed an extended life.

By the 1970s the size of rail revenues had shrunk and was about 30% the size of general revenues.

By 2015-16 it was down to 11.5% (see table). The writing was on the wall; only the Railway Board failed to read it. Many erudite scholars of economics like Swaminathan S.A.Aiyar and Bibek Debroy were now raising the pitch for discontinuance of the rail budget.

Could the IR have avoided this fate? It erred on two facets of its philosophy for growth. First and foremost was its penchant for subsidising the passenger fares from artificially jacked up freight rates. The non-AC fares have remained static for the past 12 years; this has been nothing short of suicidal. Freight rates now are at such high levels that road hauliers successfully compete with railways on grounds of being cheaper. It is not surprising that the rail share in the overall freight kitty is down from 89% in 1950-51 to less than 30% in 2014-15.

Secondly, the railways themselves have been withdrawing from their core areas of operations and concentrating on peripheral items. They have withdrawn themselves from all urban transport activities. In the 1990s if the IR had devised innovative solutions like forming Special Purpose Vehicles (SPVs) to catalyse construction of metro lines, both the people of India and the railways would have benefited from it. Instead, in the 1990s, a situation was created, albeit unwittingly, which made transportation of petroleum products cheaper by pipeline. At that time, movement of petroleum products was the most profitable business for the railways and it had a lion’s share of 75% in this sector. It is now down to 10%!

Is a retrieval from this quagmire feasible? Well, a return to the halcyon days of having a separate budget seems implausible. But, a retrieval of the railways’ financial health is quite within reach, if due focus is laid on the core sectors of freight operation and enhanced productivity of assets.

Gone are the days when the second floor of the Rail Bhavan used to reverberate with frenetic activities associated with budget preparations – Board Members closeted with the Minister having parleys on fare revision, introduction of new trains, and above all, balancing the budget. Officers carrying the budget files in their own hands, talking in hushed tones and finally sharing halwa and chai with the Minister – all this will be missed in the hallowed corridors of this pentagon-shaped headquarters of the Ministry of Railways.

It will be harsh to contend that a separate rail budget has not served the country well. In 1947, the same administration controlled the areas in the present day Pakistan and Bangladesh. Look at the fate of those rail systems today and compare it with Indian Railways. It was a separate budget which kept IR on a graph of growth throughout.

On February 1, this year, when the Finance Minister presents his General Budget, he will set the tone for the relevance of Indian Railways in the country’s ethos and future health. It will be instructive to see how much time he devotes to the rail sector in his speech.