Every year in February, the question is asked: Is there a need for a separate rail budget? You have also asked for scrapping it. Could you please explain why?
What is the need for the rail budget? Scrapping it is a terminal goal. It’s not something that you need to do this year.
Our visualised scenario is something like this: You have Indian Railways as a service provider. You have private railways also. Ministry of Railways is determining the policy. The independent regulator is implementing the policy and maintaining the harmony between the private and the public entities. The Railway Board is like a corporate board for the public entity.
Passenger traffic will be fixed by the market or the regulator. Legally, one doesn’t need to go to the parliament for fixing the tariff. What am I going to the parliament for? Partly for reporting what happened through the year which may happen through the annual reports.
Additionally, I might go to the parliament for the money that the union government gives the railways. But that can always be one paragraph in the union budget.
As a terminal goal, there’s no need for a railway budget.
It’s now a well-known fact that the railways makes much of its money from freight and that the passenger fares need to be increased for more profitability, which they did last year. Even then the situation seems to have deteriorated. What went wrong with the planning?
Railways doesn’t have the flexibility yet to reduce freight charges. Setting fares depends on our belief on how we want to maximise revenues. We can either increase fares and increase revenues or we can make it cheaper and increase volumes to boost revenues. But when we increase fares, we assume that we have an inelastic demand which won’t change with price changes.
Many of the commodities that the railways carry are inelastic, this has been the perception so far. But this hasn’t turned out to be true. You have got a double problem – revenue projections have gone haywire in both passenger and freight segments. Other revenue sources which were projected haven’t materialised yet. The finance ministry hasn’t given them as much money as they would have liked and on top of it the pay commission burden has come on the railway’s shoulders.
So essentially, the numbers are going to look bad. There’s nothing much that can be done. And even the little scope there is for tinkering with the costs can’t make the situation substantially better.
But we need to ask whether there is enough being done that the railways can improve in future.
So, let us ask that: Do you think there is enough being done to ensure that the same story isn’t repeated in the coming years and the long term?
I look at it through five pillars that we highlighted in our report.
First, what you need a is commercial accounting system which is much more comprehensive and robust than the current system being followed in the railways. Switching to it again is not a day-long task. It could take two to three years. My understanding is that it has been done on pilot basis in Ajmer division and extended now to the northern railways. It won’t instantly happen but the direction is there.
The second thing we recommended is an independent regulator. The railways has chosen not to call it a regulator but a development authority. We don’t have a bill yet but somewhere down the year, we may have the bill. Then it will have to go through the parliament’s due process.
The third thing is that we endorsed private sector entry. That is already very much happening, at least in terms of policy. There’s movement there also.
The fourth thing we mentioned was decentralisation. It’s being done at various levels of decision making.
The last thing we mentioned was breaking down the silos of entry into the railways. There are seven or eight ways of entry in the railways and we recommended eliminating it prospectively. It involves a change in the nature of the railways board. My information might be imperfect, this is the only recommendation on which there hasn’t been any significant movement.
The two most important aspects for any organisation are Human Resources and Accounts. The HR part is the one where I don’t see any significant changes.
We would like to understand a bit more about the process of rationalising HR that you mention in the report. Pay commission burden on railway’s finance is already known and various expert committees have recommended cutting down the workforce. Do you see it happening any time soon?
Yes and no. Any organisation will always have a surplus of at least 10%. The answer to the pedantic question is that there is surplus but I don’t think that’s the right approach.
Has the railways got the right kind of manpower? Our committee’s problem was that you need enough loco pilots or engine drivers. Do you have enough drivers? You don’t. Instead, you have Railway Protection Force. There’s a need of rationalisation of the workforce rather than trimming it.
The problem is much more about the composition of the workforce rather than just the total number of 13 lakh employees.
But, for now the workforce stays the same and their salaries have to be paid. What do you think is going to be the impact of the seventh pay commission?
It is impossible to answer that question. The figure that was worked out by the pay commission was on the basis of wages and salaries. But in the railways, a large part of my compensation comes through travelling and running allowances. But if I remember right, there’s a difference of almost Rs 8,000 crores between the pay commission figures and the railway ministry figures.
I wouldn’t be very surprised if it goes up to more than Rs 30,000 crores.
Entities like the World Bank and the International Monetary Fund have in the past pointed out the anomalies in railway’s accounting system. You have also recommended moving to an accrual system. What are the major issues with the current system that affect railway’s performance?
There are certain social obligations that the railway ministry has to bear. Now, imagine when railways says that our social obligation costs for the year is Rs 30,000 crores. The finance ministry says we don’t believe your figures and we can’t trust your methods.
Railways don’t even have a complete inventory.
Today, will the railways be able to tell me the complete inventory of the rolling stock?
No. We don’t know the asset side or the liabilities either.
As the railways, I want to invest in this line, I do not even know whether this line is going to be profitable or not. It’s not about just getting funding, Railways doesn’t even know its own profitability or performance.
So, once I have the commercial accounting, we will know cleanly how much the railway needs and how much it is spending. That is also when you stop wanting the railway budget.
But if we are not able to track assets effectively, and railways has a whole lot of them which are more than a century old, how are we preparing for their replacement or charging depreciation on them?
Though there is a depreciation reserve fund for that purpose in theory, it’s hardly serving the purpose. The reason is this that we decide first what operating ratio we want to show for the year. At that point, we have our revenue figures, our interest payment, and the residual amount is spent as depreciation.
So it is not that there’s a specific 10% or 15% depreciation rate that must be charged every year. It depends on the ministry and their preference of maintaining a healthy operation ratio or the depreciation fund. If they are happy with a higher ratio, they will spend more money for the depreciation.
The rate is determined mechanically, not rationally. It is not showing the true picture of the railways' assets.
Since you mentioned operating ratio which roughly tells us how many paise railways is spending to earn a rupee, it’s important to point out that by December, it had climbed up to 97.8% while the target for this year is of 88.5%. Do you think we can achieve it by the budget?
If you ask me, I think for December it should be around 98%. By the time the budget is presented, it will definitely cross 100%. If I factor in the entire pay commission, and everything is as it is then you will stare at 110%.
This implies that we have once again started losing money on operations.
But we must have had some rationale to target 88.5% for this year...
I did not believe the revenue projections for this year. I didn’t believe it one bit. I saw no reason why the railways would suddenly become so optimistic.
The railways has also been paying interest to the government to the tune of Rs 6,000-Rs 8,000 crore each year and this time it may increase to Rs 10,000 crore and yet it is called a dividend. What’s your stand on this loan on perpetuity when the principal is not being paid back at all?
Calling it a dividend is a misnomer. It’s an interest on the government’s capital invested in the railways but its rate is set by a parliamentary committee each year. What we are saying to the government is that you give support to the railways on one hand and take dividend from the other hand.
We want the government to just give railways the net amount so that there’s lesser confusion. We have also said that you extinguish the capital because it’s in perpetuity.
We have said that you finish the system of these dividends.
Recently, the debate about railways’ obligation has also flared up. Is it a public service carrier meant to serve the nation or a corporate entity which is supposed to make profits and pay interests like every other company?
The debate, I think, is misplaced. The railways has to build lines that it would not have built for commercial reasons – let’s say, in the northeast. It got money from the government for that. It has to have fares that are cheap.
Our argument is that fares do not have to be cheap for everyone. Railways should make the fares cheap for people who are below the poverty line. To extrapolate the argument, since we are talking about direct benefit transfers, send the money to their bank accounts.
Nobody is saying that we don’t need to subsidise but subsidise who actually needs the subsidies.
NITI Aayog itself has questioned the ability of railways to complete its pending projects. There are more than 300 projects pending and many others are in process but the revenues don’t seem to have increased. What do you think is happening on that front?
Each project, on average, has a life cycle of two to three years, which it takes to complete. Even if in this budget of this year, the minister announced that this and that would happen, I never believe it would happen this year. The budget projections were too optimistic, unnecessarily so.
So far as the projects are concerned, railways sometime does its own construction while sometimes they are given to something like the Rail Vikas Nigam Limited. It, for example, has a far better efficiency. Of late, I think that the railways is giving more projects to the likes of RVNL and that’s a welcome step.
There’s also the question of trimming down railways’ areas of operations. It runs schools, hospitals and many other things which take money from its budget and don’t really produce revenue. What do you think is the best course of action here?
Railways’ core business is running trains so it should hire loco pilots, that’s not a problem. But I don’t see why it should run schools, colleges or even the RPF. RPF is a big revenue strain as well. It costs about Rs 24 per train kilometre for the security.
We continue to say in the final report that railways should focus on its core activity. We have recommended that the railways outsource its parcel business on which it is losing money. We have said that you get in the private sector and let them run it for you.
First thing that we need to know is that none of these operations is making railways any money. Technically, they are losing money on everything. There’s not even a single thing which is making them money except maybe, AC 3 Tier passengers where there could be some profits.
But we don’t know if indeed AC 3 is profitable because of the accounting system...
That’s true. We can’t say anything for sure in this situation.
You have highlighted in the report that line capacities are running over 100% in many sectors but what about those which still have the potential? Why don’t we run more trains and increase revenue?
You may think that there’s a possibility of running trains between Jodhpur and Jaisalmer where there’s capacity. But the problem is that there might be stations on this line where there could be traffic. And the bigger problem is: Who wants this train if road is so competitive?
The story of what is happening is that because the dedicated freight corridor is moving much faster on the western side of the country than the other areas, we will continue to have problems on the eastern side.
In the long run, we should build more capacity to ease pressure. But in the short term, if we have got capacity constraints, we shouldn’t run 12,000 trains. We are running trains with eight coaches. We should merge trains and run them with say, 24 coaches. This is politically difficult but that’s the thing we have done.
Coming back to the issue of financing, we have taken a huge loan for the bullet trains and the reaction to it are quite polarised. Do you think it is worth the liability when bullet trains haven’t been profitable anywhere in the world?
Actually, the loan is quite on attractive terms. If you look purely at the terms of the loan, the terms are more attractive than the Delhi metro. But the question about profitability still remains.
You are right that it hasn’t been profitable anywhere in the world. It becomes viable from real estate development along the line. I have not seen the report on this stretch but we should ask if there are stations along the Ahmedabad-Mumbai stretch that could make the bullet train viable through real-estate earnings. I don’t know that yet.
Otherwise, I will need to run 12 trains a day on full capacity at Rs 4,000-5,000 per ticket to make any profit. That can’t possibly happen.
Suresh Prabhu has claimed that there’s no debt on railways’ balance sheet so it can afford to take more loans for infrastructure. How true is that given that the railways is paying substantial interest on its debt obligations?
We are paying dividend and interest to the government every year. All of that is debt. I don’t understand why he said so. Now we are going to take a lot of money on infrastructure. This is a technicality. The railways cannot borrow directly and the borrowing is by the Indian Railways Finance Corporation.
Maybe he was being pedantic and saying that railway is free of debt but the IRFC is not.
Lastly, what has been your evaluation of Prabhu’s period as the railway minister so far?
In the last three months, reforms actually seem to have picked up. Even after writing the report, I wasn’t too happy with the performance but now things might be going the right way.
What will happen is that if the rates are changed by the ministry for passenger or freight, then you will have to justify it in the parliament. But, tactically, they could do it through the regulator and say that that body has said so. I think this will happen in the near future and it should relieve some pressure off the freight business.
This is the last in a three-part series on the railways. You can read all the articles here.