Railway Budget Stays On Course With Focus On Capacity Creation

The Railway Budget 2016-17 dovetails into the five year agenda unveiled last year with emphasis on capital expenditure for improving supply side capacity. However, finding the financial resources to fund a Rs 1.2 lakh crore capital spending plan in next year would be a formidable challenge given the deterioration in operating ratio to 0.92.

The problem gets compounded when one considers that the largest contribution to budget comes from freight revenues which the budget proposes will grow by 10 per cent next year, an optimism which may be challenged by risks posed by slackening international demand and slow recovery in domestic market.

Emphasis on finding alternate sources of finance through various mechanisms like multilateral funds, rupee bonds, JVs with states and PPPs have been suggested but the challenge will be to assure serviceability of these funds from non-budgetary sources. Reliance on PPPs as a source of finance, would need to be watched carefully, as it is now becoming abundantly clear that expeditious enactment of regulatory bill for creation of Rail Development Authority will be a necessary pre-requisite for assuring PPP investors. Measures for monetization of land and space rights over railway station, will be contingent on IR’s ability to provide a balanced risk framework to private partners.

The budget lays down many promising initiatives for improving project delivery, transparency in procurement, standard contracts for EPC and thereby gives confidence that the absorption capacity for capital outlay could possibly see further improvement in the current year. Such improvement in absorption capacity is critical to ensure that delivery of projects improves from 7 km per day to 19 kms. per day in next five years.

An important announcement is the proposed DFC on East Coast and between Delhi and Chennai, which will improve lateral linkages to North India, thereby leading to rebalancing of exim cargo flows between east and west coast in next decade, and bring down logistics costs for many businesses, while easing east bound trade. Another interesting proposal is the opening up of general wagons for leasing business.

Railways’ role as a logistics provider is now being given a definitive direction with intention to introduce long term contracts with cargo providers, intentions of rationalization of freight rates, providing business service managers for customized account management, and proposed steps for reorganization of Railway Board along business lines. In addition, the opening up of parcel business to CTOs could help IR penetrate the rapidly growing e-commerce segment.

The action in the coming year on these initiatives, will determine whether IR will be successful in enhancing its modal share in freight in future years and consequently its ability to find the resources to deliver on the 8.56 lakh crore investment agenda by 2019.