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Prabhu's budget aims at more investment without sacrificing populism

Railway minister Suresh Prabhu’s rather business-like budget is an attempt at marrying canny entrepreneurship with uncanny populism to set out a medium to long-term vision for the network that is crying out for modernisation.

comment Updated: Feb 26, 2015 23:54 IST

The Indian Railways, over the past few years, have had to deal with precarious finances and political one-upmanship. A lot was riding on the first budget of Suresh Prabhu, a former chartered accountant, and a “reformist” credited with laying the foundations for reforming India’s electricity sector during his stint as power minister in Atal Bihari Vajpayee’s government. All eyes were on Mr Prabhu’s budget to indicate the extent to which Narendra Modi’s government is willing to innovate regarding the economy.

Mr Prabhu’s biggest challenge was to mobilise resources to fund capital expansion and modernisation since the railways’ infrastructure spending has stagnated around 0.5-0.6% of GDP in recent years. India’s rail network has barely grown and is in sharp contrast to the trend of rail network expansion in neighbouring China. The Chinese lug twice as many wagons on a rail network roughly our size to carry nearly four times our freight. Around a fifth of India’s tracks are still meter gauge, rendering them unfit for cargo.

Mr Prabhu has pencilled in a Rs 8.56 lakh crore investment plan during 2015-20, to be mobilised from multiple sources — multilateral development banks and pension funds. He has set a plan outlay to Rs 1,00,011 crore for 2015-16, up 52% from the previous year. There are elements of grand purpose in the budget. The railways’ operating ratio—the rupees spent to earn every extra Rs 100—has been now pegged at an ambitious 88.5 for 2015-16 from 91.8 in 2014-15. This could be a tall task because the improvement in internal resources generation is predicated upon a 16.7% rise in passenger earnings. Given the competition from highways and airlines, this may well fall short.

Eventually, though, the top line could have a significant upside: the railways is targeting nearly 17% growth in freight earnings to Rs 1,21,423 crore, with an expected all-time high incremental traffic of 85 million tonnes, anticipating healthier economic growth. With the freedom to change haulage rates, it just might be able to pull a few rabbits out of the hat if the economy picks up steam.

Mr Prabhu has made it clear that the government will no longer baulk at taking the next logical leap of corporatising large chunks of the network or just be content with seeking joint ventures at the fringes. A logistics corporation to generate additional freight revenues and a new entity to connect ports through railway tracks are key modernisation initiatives. Indian railways has suffered from low investment and populist policies to subsidise fares turning the once-mighty system into a slow and congested network that crimps economic growth. The budget defines a plan that includes setting up of a Financing Cell in the Railway Board to turnaround the state-owned behemoth. Prabhu’s rather business-like budget is an attempt at marrying canny entrepreneurship with uncanny populism to set out a medium to long-term vision for the network that is crying out for modernisation.