How the Railways tweaked reserve funds

An analysis shows the ministry had cut its appropriation to PF by Rs 400 cr and that to Depreciation Reserve Fund by a sharp 30% or Rs 2,400 cr

A simple tweaking of resources meant to be appropriated into the Depreciation Reserve Fund (DRF) for the Indian Railways seems to have emerged as a major face-saver for Railway Minister Suresh Prabhu in this year's rail Budget. The rail ministry has cut down the funds meant for DRF to show a less unwholesome operating ratio, the parameter on which the Railways' financial health is judged.

DFR is one of the five key funds maintained by the Railway Board and is channelled to meet expenditure for upkeep and replacement of crucial assets including railway tracks. The operating ratio represents the amount of money spent to earn every Rs 100 and acts as a yardstick of financial prudence.

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The ratio is calculated by measuring total expenditure (including Ordinary Working Expenses, or OWE, and appropriation to Pension Fund and DRF) as a share of Gross Traffic Receipts. Prabhu had in last year's rail Budget promised to improve the Railways' operating ratio to 88.5 for 2015-16. The assumption was based on OWE of Rs 1,19,410 crore, budgeted appropriation to Pension Fund of Rs 34,900 crore, appropriation to DRF of Rs 7,900 crore and gross tax revenue (GTR) of Rs 1,83,578 crore.

A year later, the ministry announced the revised operating ratio of 90 for 2015-16 arguing the minor slippage from the budgeted number (from 88.5 to 90) was on account of the poor performance of the economy. However, a Business Standard analysis shows the ministry has actually cut down its appropriation to PF by Rs 400 crore and the appropriation to DRF by a sharp 30 per cent or Rs 2,400 crore to arrive at a revised operating ratio of 90 for 2015-16 in the wake of a nine per cent decline in GTR.

If this tweaking had not been done and had the rail ministry appropriated to the two crucial funds the amount it had budgeted for a year ago, the figure of operating ratio would have actually deteriorated to 91.4. This assumes OWE and GTR to be at the same revised levels.

Further, the analysis also reveals the budgeted operating ratio for 2016-17 would have deteriorated sharply to 94 - compared to 92 announced by the railway minister last Thursday - if the ministry had kept the budgeted appropriation to DRF even at the 2015-16 (budgeted) level of Rs 7,900 crore.

The rail ministry has arrived at the budgeted operating ratio of 92 for 2016-17 by considering OWE of Rs 1,23,560 crore, appropriation to PF of Rs 42,500 crore, appropriation to DRF of a minuscule Rs 3,200 crore (a 60 per cent dip compared to 2015-16 budgeted DRF of Rs 7,900 crore) and GTR of Rs 1,84,819 crore.

This is a huge 10 per cent increase in earnings from the revised 2015-16 GTR of Rs 1,67,834 crore at a time passenger volumes are falling and freight targets have been missed like never before. Indian Railways could carry only 10 million tonnes (mt) of incremental freight in 2015-16 against the budgeted 85 mt. Yet, the target for carrying additional freight next year has been set at 50 mt.

The strategy of tweaking allocations for reserve funds to show a healthier state of railway finances might have helped the current railway board save its face in the larger gloomy scenario of finances, but it does not augur well for Indian Railways' operational health going forward, experts say.

"Contrary to rumours of poor freight loading and depressed passenger numbers leading to plummeting revenues in the current year, the rail minister seems to have taken out a genie from his bag and fixed the revised target for operating ratio at 90. To make the projections even more curious, the operating ratio target for 2016-17 has been pegged at 92 despite the projected massive payouts for the Seventh Pay Commission. How has this magic been achieved?" asks Samar Jha, former Financial Commissioner of Railway Board.

He adds that the cut in appropriation to DRF from Rs 7,900 crore in Budget Estimates to Rs 5,500 crore in the Revised Estimates (2015-16) represents an 'insidious' cost reduction. "Even more worrying is the projection of a mere Rs 3,200 crore appropriation in 2016-17. Even the physical target for track renewal, a vital aspect for safe running of trains, has been reduced to 1,500 km from 2,300 km in 2015-16. Achieving financial targets at the cost of safety is certainly not desirable," Jha said.

In a press conference last Thursday, Railway Board Chairman A K Mital had said Indian Railways managed an operating ratio of 90 for 2015-16, which was a "reasonably good" performance given the slow growth in the core sectors of the economy due to global slowdown and the hit to freight loading. He said the impact of the pay commission on this year's Budget included Rs 12,500 crore on account of wages and Rs 8,500 crore on account of pension liability.