The railways' challenge

Focus on funding and better use of existing capacity

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It is likely that the coming Railway Budget will neither raise nor lower passenger fares. Any adjustment in fares to take care of changes in fuel costs had been delinked from the Budget by the previous United Progressive Alliance government. Even so, an attempt to raise passenger - including suburban - fares sharply last year by the National Democratic Alliance government shortly after it came in had to be substantially rolled back after protests from within the alliance. The issue right now is if, in view of the recent fall in fuel costs, passenger fares will be correspondingly reduced. A junior minister has indicated they would not be cut, as passenger services remain heavily subsidised. This makes sense in view of the railways' precarious finances. But the carrier has also to worry about losing market share, not just in freight but also in passengers. Last financial year, passenger volumes (in terms of route kilometres) actually fell by just over two per cent over the previous year.

Thus, the key dilemma facing Railway Minister Suresh Prabhu as he formulates his maiden Railway Budget is how to shore up the railways' finances without having the luxury of going in for significant price hikes for fear of a further fall in market share. As the economy is yet to pick up, it will be inadvisable to assume large revenue increases based on traffic growth for the coming year. So the least he can do is to announce as few new trains as possible. His second and bigger challenge is to access large investments to both increase capacity substantially and take the national carrier into a new era of efficiency, both for passengers and freight.

There are two ways of garnering sizeable additional resources - improve internal efficiencies by cutting down waste and corruption, and get external funding. On improving efficiency, Mr Prabhu brings to his task the reputation of being an efficient administrator. But the scope for extracting greater physical efficiency is limited as substantial progress has already been made in this area in recent years.

This leads to the overarching issue of tapping outside funds. The scope for additional central budgetary support is limited, and so Mr Prabhu has spoken of the need to "connect" with the state governments. But they are not exactly rolling in money. Thus, the future for the railways, and the sentiment that the Budget will create, will rest substantially on the minister's ability to signal openness to private investment, both domestic and foreign. The government has already approved foreign direct investment in numerous areas while reserving for itself only the core areas of traffic and operations. But success in attracting outside funding will be influenced mainly by how well public-private partnership (PPP) deals are worked out, and whether the model concession agreements are viewed as sufficiently friendly to investors. The railways has been open to the PPP idea for a considerable time, but they are yet to take off in any significant way. However, the development of dedicated lines, on which the future of the railways depends, will hinge on how much private funding can be raised and how judiciously it can avoid the temptation of going in for expensive high-speed rail projects. The priority should be to implement the existing projects and improve the efficient use of capacities already created.