Railway finances to stay in the red

The Indian Railway's finances are likely to continue their downhill journey the next financial year, and this, despite Railway Minister Mamata Banerjee's claim of a revival of the national transporter's financial health.

Experts believe that reduced fund balances and an unprecedented exposure to debt will lead the railways' downturn in 2011-12.

The balance of the five reserve funds of the Indian Railways - Depreciation Reserve Fund (DRF), Development Fund (DF), Pension Fund, Capital Fund and Security Fund - are a measure of its flexibility to meet expenditure and asset expansion.

Fund balances for the current financial year have already been revised downwards by the ministry from the budgeted Rs 5,062 crore to Rs 3,100 crore (Rs 50.62 to 31 billion).

Even for the next financial year, they are expected to come down 56 per cent to Rs 1,365 crore (see table).

"A deteriorating fund balance will adversely impact the internal generation in fund. The railways is increasingly becoming dependent on budgetary support to conduct even existing business. This leads us to the question, is the Indian Railways becoming an albatross across the government's neck?" said R Sivadasan, former financial commissioner.

The ministry, however, rejects the logic of reduced balances arguing that fund balances were never too high. "Five years back the balances had increased to Rs 22,000 crore (Rs 220 billion) in 2007-08 since that money was not being utilised," said a senior railway official who did not want to be quoted.

One of the major highlights of this year's Rail Budget (2011-12) was the proposed market borrowing of Rs 20,594 crore (Rs 205.94 billion) through Indian Railways Finance Corporation (IRFC), including Rs 10,000 crore (Rs 100 billion) in tax-free bonds.

The move was explained by the chairman of the Railway Board Vivek Sahai as a model that was being followed the world-over to meet infrastructure expansion requirement.

"Historically, Indian Railways has never let its debt exposure exceed Rs 5,000 crore (Rs 50 billion). The idea of a heavy exposure to debt for the next year is pretty bad.

Railways is entering a debt trap by doing this. As this loan will come at an overall rate of 10-12 per cent, railways will have to raise an additional Rs 2,200 crore (Rs 22 billion) in a year just to service it," Sivadasan said.

He said that market borrowing should be seen only as a means to bridge the gap in plan size after accounting for internal generation and the budgetary support. "Unbridled doubling of market borrowing will make it impossible to step up future internal generation," he said.

The rail ministry has increased the expected internal generation from traffic earnings by 13 per cent from Rs 94,000 crore (Rs 940 billion) to Rs 1,06,239 crore (Rs 1,062.39 billion) during the next financial year.

It is hopeful of exceeding the current year's target despite a ban on loading of iron ore for export, which pulled down earnings by Rs 2,500 crore (Rs 25 billion).

The worsening finances are indicated also by railways' operating ratio (OR), the sum of money spent to earn Rs 100, which Mamata projected will improve marginally to rest at 91.1 next financial year from 92.1 this year.

The rail ministry has only three ways to improve the OR - reducing ordinary wrking expenses (OWE), decreasing outgo from pension fund or pull down DRF to the extent feasible.

"Since reducing OWE takes a long time and tinkering with pension fund is not possible, we have to resort to DRF to improve OR," said a senior official from the ministry.

A depleted DRF, while helps showing a healthy OR, also reduces railways ability to renew depreciating assets.

Experts believe that at least 8 per cent of Indian Railways' revenues have to be channelised to DRF to take care of the wear and tear in assets.

The rail ministry appropriated Rs 5,800 crore (Rs 58 billion) to DRF in the current financial year, around six per cent of the overall traffic receipts of Rs 94,800 crore (Rs 948 billion).