Relevance: GS-3: Indian Economy, mobilization of resources, changes in industrial policy and their effects on industrial growth.

Key phrases: Raising passenger fares, infusion of investments, spending hikes, PM Gati Shakti Project, capital expenditure, CAG, financially sustainable, Rail Service Price Index, off-Budget borrowing, self-reliance.

Why in News?

• Raising passenger fares, and completing existing projects rather than splurging capex on new ones can help.

Context:

• The Railways’ portion of the Union Budget had the same build-up as the overall Budget. The pandemic-time economic downturn had called for sidestepping concerns of fiscal consolidation to revive and boost aggregate demand. The public sector behemoth, ailing with years of loss and hunger for a big infusion of investments, had called for spending hikes. So, while the government ritualistically raised the budgetary allocations for the Railways, this year’s Budget indicates the Railways shows some promise of a future revival.
• In line with the growth-oriented policies aimed at pushing up public spending, Budget 2022 has allocated ₹1, 40,367.13 crore to the Indian Railways for 2022-23, which is 27.5 per cent higher than in 2021-22. Compared to the revised estimate of ₹1, 20,056.12 crores, this year’s budgetary allocation is 16.9 per cent more.
• Railways is one of the vital and critical sectors of the PM Gati Shakti Project. While a massive increase in capital expenditure (capex) is welcome, there was no stated plan or strategy to make the Railways financially sustainable.
• The Budget allocation is significant because the Indian Railways’ operating ratio has languished for decades. It has been pegged at 96.98 per cent for 2022-23. The operating ratio implies that out of ₹100 earned, the Railways spends close to ₹97 for running the business. Thus, this leaves significantly less money for much needed capital expenditure in the Railways.
• However, according to the Comptroller and Auditor General of India (CAG), the actual operating ratio for the year 2019-20 stands at 114.35 per cent if the actual expenditure on pension payments is considered. Thus, the CAG, in its report submitted to Parliament, suggested that the passenger fares should be revised to recover the cost of operations in a phased manner.
• The CAG report estimates suggest that the national carrier suffered a loss of ₹63,364.25 crore in 2019-20 on account of operations of passengers and other coaching services. This is 74.6 per cent more than the loss of ₹36,286.83 crore in 2015-16. It is to be noted here that freight service makes a good profit which is used to subsidise passenger services. This loss is due to fare concessions given to passengers in the Suburban Railways and Railways.

Fare hike is a Remedy

• Unfortunately, the Indian Railways has not paid heed to the CAG’s suggestion of revisiting passenger fares and tariffs on other services to date. It must raise passenger fares reasonably on a regular basis to be financially sustainable before it turns another Air India.
  • First, without adequate and smooth revenue generation, modern rail infrastructure and amenities cannot be provided and viable.
  • Second, the rail price hike has been put on hold for a long time. The Experimental Rail Service Price Index, prepared by the Department for Promotion of Industry and Internal Trade, shows y-o-y average price change was 2 per cent from 2016-17 to 2018-19, average CPI inflation was 3.84 per cent during that period.
  • This implies that whereas retail price across the board has been rising, the Railways did not keep pace with them. Passenger and freight rates were last revised in the 2014 Budget.
  • Suburban and intercity local railways pricing have not been optimal and welfare-centric as well. A 2016 CAG audit report estimates that revenue loss of suburban railways during the period 2011-11 to 2014-15 was ₹13,631 crore.
  • Third, the government may go for off-Budget borrowing. But this may raise fiscal deficit concerns and inflationary tendencies. Off-Budget borrowings may not be a significant source of investments as the government’s total debt has already reached 90 per cent of GDP, the highest ever, and the bond yields are expected to shoot up. This could make it costlier for everyone to borrow.
  • Fourth, because the Railways has been cash-strapped over the years, it has put undue pressure on freight prices. Subsequently, the rail carrier’s share in freight movement has steadily declined over the years.
  • The fifth and final rationale for increasing rail fares at this point is that of self-reliance.

Financial Independence of Railway:

• Since it is our national transport carrier, nobody demands that it earns high profits, which aligns well with the welfare state perspective. Its mandate is to fulfil the social objective. However, we cannot expect to see it make huge losses forever. Otherwise, it will be another PSU going kaput someday and open for full privatisation, which is undesirable. Ideally, it should make enough profit to enable it to spend on infrastructure upgradation and modernisation.
• A rail fare hike is politically viable as the Lok Sabha elections are still more than two years away. Therefore, we have some time to try and get the Railways out of the financial mess.
  • One feasible way is freeing rail fares from the government’s control. A rail fare commission may be established, which can set the fares based on demand and cost conditions. The government can administer incremental fare revisions outside the Budget. This way, the government can escape the political noise as it happens in the case of petroleum prices.
  • Second, local bodies and State governments may be made to defray the cost of subsidies for suburban traffic if it cannot be recovered from the fare basket.
  • Third, the Railways has to introduce more tourist-based trains and charge a good premium for this.
  • Fourth, taking a leaf out of metro rail’s books (which runs successfully), it needs to implement pre-paid card-based ticketing. This would minimise ticketless travelling and will result in increased revenues for the national carrier.
  • Finally, revenues can be raised through non-fare sources such as advertisement and publicity, e-auction, monetisation of land and other assets, parking fee, sale of scrap, monetisation of entertainment-based services on trains and stations, and allowing branded business shops inside trains (hair salon, beauty spa, fastfood chains, etc).

Way Forward

• With heavy losses on the passenger side, the Budget has failed to be creative and futuristic on the ways and means of revenue creation. Huge capital expenditure infusion is aimed at boosting the coffers of the major private sector railway players. Moreover, despite the periodic CAG warnings and artificially declaring a sub-100 operating ratio over the years, the window dressing of its accounts has never been the long-term policy solution.
• Over the years, the Railways has focused on increasing the number of trains on its fleet rather than expanding the tracks and routes. This policy has been ineffective and unviable as a result of increasing traffic congestion, delays and sub-optimal traffic management.
• The Budget has allotted another ₹2.45-lakh crore on capex, whereas it would have been prudent to complete ongoing projects first before committing resources on new projects. Many rail projects have not been financially viable too. The Railways cannot be expected to perform well if it continues to be in a ‘one step forward, two steps back’ policy mode.

Source: The Hindu BL

Mains Question:

Q. ‘The Railways needs to stand on its own feet by becoming financially independent and financially sustainable before it turns another Air India.’ Critically Examine.