Testing Times: Indian Railways running a test in its ‘Borrowing Limits’ as Debt Servicing Costs expected Double in 5 Years!

The IR debt servicing costs are set to rise at a much faster clip starting FY21 and might more than double in five years from now as repayment obligations concerning DFCC and the proposed Highspeed train network will kick in. Coinciding, Finance Ministry also asked asks Indian Railways to borrow funds from market!

NEW DELHI: The Indian Railways’ (IR) debt servicing costs are set to rise at a much faster clip starting FY21 and might more than double in five years from now as repayment obligations concerning Dedicated Freight Corridor Corporation of India (DFCCIL) and the proposed high-speed train network will kick in (see chart). With its capacity expansion/asset replenishment projects already on a slow lane — against this fiscal’s capex budget of Rs 1.46 lakh crore, the sanctioned projects are worth over Rs 5 lakh crore — the transporter is at the risk of a putting a freeze on new projects.

According to official sources, as the railway ministry raised this issue with the finance ministry recently, and asked for a 40% increase in this year’s (FY19) gross budgetary support (GBS) from the budgeted level of Rs 53,060 crore, the latter has instead asked the Indian Railways to borrow the extra amount and promised that it would pay up the principal part of the loan as and when the repayment begins. But the railway ministry, the sources said, declined to accept this offer as it felt its borrowing limits are being tested already. In a netshell, Indian Railways has been asked by the Finance Ministry to borrow funds from the market. Additionally, the Finance Ministry has also asked the national transporter not to expect the requisite funds as additional Gross Budgetary Support from the Budget.

For FY19 itself, the IRFC bonds (the conventional market borrowing tool for IR) to be issued are worth Rs 28,550 crore and the transporter is scheduled to raise another Rs 26,440 crore from institutional sources (Life Insurance Corporation), through issuance of 30-years-tenor bonds to the insurer by IRFC.

“We cannot have unlimited borrowings… Too much of reliance on the market could impact the perception about our creditworthiness and raise our costs,” said a railway ministry official, requesting anonymity.

While the insurance regulator Irdai’s single-entity exposure cap for insures had come in the way of raising funds form LIC — as per a March 2015 memorandum of understanding between the transporter and LIC, insurer will provide a financial assistance to the tune of Rs 1.50 lakh crore to the latter’s identified projects between 2015-2019 —, the government has recently addressed this issue by providing government guarantee to the IRFC bonds issued to LIC sans any limit.

The North Block is believed to be have mooted reducing GBS to zilch and repayments from the consolidated fund of India of principal amounts of IR’s resultant (enhanced) borrowings — this will help the central budget in the short term because the repayment obligations will be only a fraction of the current GBS size in the initial years.

However, the railway ministry reckons that this is not a viable proposal. While the railways doesn’t have any extra borrowing room given its stagnant revenue receipts, a large chunk of projects are non-remunerative and are, therefore, not meant to be funded via borrowings, the ministry argues. Further, an equity infusion in a clutch of railway PSUs cannot be done via borrowings and requires to be funded out of the budget. Also, multilateral loans from World Bank and JICA, etc, require to be routed through the budget for sovereign protection to the lenders. A win-win situation, analysts said, could be the finance ministry — read the central budget — bearing the entire future debt servicing costs (principal and interest) of the transporter while retaining a part of GBS, roughly half the current level, for “nationally important” (unprofitable) projects and multilateral funds.

Of course, the viability of even this model hinges on how fast the railways could restructure its tariff regime with a view to reduce the cross-subsidy to the passenger segment — around Rs 30,000 crore — and accelerate freight earnings by arresting the loss of traffic to the road segment. The transporter had reported its worst operating ratio since 2000-2001 last fiscal, at 98.5%, even after several last-minute accounting adjustments; foolproof accounting will no doubt raise the ratio to beyond 100%, indicating an operational deficit.

Even after the merger of the rail budget with the central one, the railways’ pension bill — close to Rs 47,000 crore last fiscal thanks to the Seventh Pay Commission-induced hikes — is shown on its own books, as part of revenue expenditure. The railway ministry has demanded that the central exchequer should handle the pension of 14 lakh railway pensioners too, just as it does of other government employees. “We may also be allowed to reduce our borrowing costs by access to National Small Savings Fund,” a said the official quoted above. The official added that from the transporter’s side, the scrapping of some of the non-viable projects and giving priority to “last-mile projects” (commissioning of projects with earnings potential, where substantial work has been done) would be the right approach.

his year, around Rs 10,000 crore are required by the National High-Speed Rail Corporation (NHSRCL) for land acquisition, part of Indian government’s commitment towards the Rs 1.08 lakh crore mega project. Also, for the Dedicated Freight Corridor project, there is a commitment of around Rs 5,000 crore.

In total, the national transporter sought nearly Rs 18,000 crore from the Finance Ministry, the report stated. However, after several meetings between the two ministries, Indian Railways has been asked to look for ways to raise the amount from the market, which is to be repaid by the Finance Ministry later. While the Finance Ministry has said that the principal amount will be paid by them, the national transporter has said that it will not be able to bear the yearly interest as well as associated charges. Also, borrowing the amount could mean that the cost of funding by the Indian government will escalate for the bullet train project which is billed to be “as good as free” owing to the inexpensive Japanese loan, the report stated.

As per the pattern of shareholding, Rs 10,000 crore is to be paid to the NHSRCL by the Indian government, while Gujarat and Maharashtra, are to pay Rs 5,000 crore each. The rest of the amount is to be paid through a loan at 0.1 per cent interest by Japan.

According to Finance Ministry officials, there is no problem in the funding. The officials also said that in an attempt to keep the fiscal deficit under check, raising money from the market is part of the government’s ways of funding projects through various methods.

For railways, one of the ways for borrowing money is through its financing arm, the Indian Railway Finance Corporation (IRFC). For the implementation of various projects, it has tapped into loan from the LIC. But, borrowing money from the LIC for the bullet train project will be a problem because as per rules set by the Indian Railways, the money from LIC can only be tapped into for remunerative projects which have a healthy financial rate of return, the report stated. Meanwhile, an amount of around Rs 1,800 crore has been earmarked for the Mumbai-Ahmedabad bullet train project in the current fiscal’s budget.