Investment drives growth but for that you need an honest and robust system to evaluate the benefits and scrutinise the returns after investing
The media agog with the details of the resume of the new minister for railways, Ashwini Vaishnaw presumably because here is a man who has a genuine repertoire of experience: He is an engineer with a M.Tech. from IIT, Kanpur; he is a management graduate from Wharton, he started his working life as a District Magistrate in Odisha; later joined the private sector; launched his own enterprises and then joined politics.
His elevation to this level is unprecedented for a retired but young bureaucrat-cum-captain of industry. He also heads the important ministries of IT and Communications. His arrival is met with optimism also because a sense of gloom has set in the organisations he now heads. Behind the smoke screen of hypes and photo optics lie organizations that are in a shambles. He faces mammoth challenges, particularly as the Minister for Railways. What are the daunting challenges?
It is said Indian Railways (IR) has improved its operating ratio (OR) for 2020-21 to 97.5 from 98.4 in 2019-2020, the rise attributed to strict monitoring of expenses through a “combination of initiatives aimed at maximizing revenue receipts and minimizing controllable revenue expenses”. The OR is a measure of operational efficiency and resultant financial performance and it would be big news because 2020-21 was a year in which IR did not run most of its passenger trains because of the Covid-19 pandemic while all its fixed costs remained the same as before. To claim improvement in such a year is nothing but overkill. Large-scale jugglery of the main data is on for a couple of years and unless an apple-to-apple comparison is made, all it would do is to present a rosy picture by obfuscating the truth. And there lies a tale, which I would present first before going into the misery of the last year.
The operating ratio is the amount spent to earn every rupee and therefore the lower it is, the better. It is a ratio, with Total Working Expensesin the numerator and Gross Earnings in the denominator, worked out every Financial Year. The practice of using OR is over five decades old. Working expenses include all expenses on fuel, administration, running, maintenance, etc., and added to the contribution made to Depreciation Reserve Fund (DRF) and Pension Fund (PF). The former was created way back in 1924 to take care of the depreciation, i.e., replacement or rehabilitation of its huge assets and the latter was instituted in the 1960s to cater to the rising burden of pension of retiring IR employees. Initially, these contributions were higher than the actual expense on these counts such that a fund is built up for the future but today this contribution should logically, at least, equal the actual expense. Gross earnings comprise the earnings from freight and passenger transportation, miscellaneous, and non-fare sundries with transportation being the main earner. In 2010-11, the operating ratio was 94.6. In 2015-16, it was 90 while in 2019-20 it rose to 98.2.
Crediting practically nothing to DRF does not mean that the assets in use on IR have suddenly stopped ageing. It merely shows that it is an unwise attempt to merely defer something that will cause you greater pain in the future. The reduction in the contribution to PF by more than half shows that the rest of the Rs 49,000 crore of actual expenses were met from borrowings and that is living dangerously close to a perennial debt trap. Why such a futile exercise to window-dress the financials? Is it because the ministry had decided to go on a spending spree?
Investment drives growth is the mantra brought in by Suresh Prabhu, a former Minister for Railways, but for that, you need an honest and robust system to evaluate the benefits before investing and scrutinize the returns after investing. That does not seem to have been done. The system was hitherto geared up to invest around Rs 50,000 crore per year in capital works. The same system was suddenly commanded to take the expenditure to well past Rs 100,000 crore with a view to invest Rs 800,000 crore in the next five years. With severe pressure on officers to comply, investments have been, and are being, made indiscriminately with scant regard for cost-benefit.
The way the investments were made over the years would falsely present IR as a ripe destination for public investments. While the working expenses have been going up significantly, Capex, which used to be much below it, has shown colossal jumps to such a stage that it exceeds it. This type of investment jig would be justified only on the condition that matching returns on investments boost the earnings; but how does that look? The numbers are almost surreal given the background of IR's spending party. For instance, the budgeted gross earnings in 2015-16 were Rs 183,578 crore while the actual earnings were Rs 164,334 crore. The figures for 2019-20 were Rs 205,733 crore and Rs 174,356 crore, respectively.
It shows consistent underperformance in earnings by more than 10 per cent. Surely the IR knows how to budget and perform close to its targets? Is it, therefore, a deliberate accounting projection to show a hunky-dory picture to invite more infusion of capital? With the merger of the railway budget with the general budget around the time when heavy investments started in IR, it now has multiple bulwarks of safety from irresponsible financial adventures and also walls to hide behind. The obvious profligacy is partly rooted in the newfound comfort of extra-budgetary support from the central Union government which is nothing but akin to a subsidy.
And what is this about the OR for 2020-21 being brought down to 97.5? The gross earnings in the year, despite the much-hyped three per cent increase in freight earnings, was an abysmal Rs 140,472 crore which has been blamed entirely on the crippled and then reduced, passenger services. The talk about increased earnings through rationalization and optimization of tariffs is nothing but higher passenger fares on regular trains run as special trains and an increase in freight tariff in certain segments. Great credit has been taken in reducing expenditure by optimization of contracts and procurement of goods and services, and savings in energy costs. In a scenario of drastically reduced services with a large number of diesel locomotives stabled, these numbers hide more than what they reveal. The bottom line is that the OR, which has perhaps climbed to around the unprecedented 125-mark has again been artificially kept below 100 by taking care of pension through borrowings and not providing for depreciation. A new low has been reached by crediting only Rs 523 crore to PF and Rs 200 crores to DRF although the pension expense itself was in the range of Rs 54,000 crore in the year.
What is the road forward? Once the vicious cycle of the impending ruin is clear to the new minister, he would have the task cut out to address the basic issues.
(The writer is retired General Manger, Indian Railways. The views expressed are personal.)
