A passenger stands in a carriage doorway on the Kalka Mail train as it stands at Mughalsarai Junction (Photographer: Dhiraj Singh/Bloomberg)

The Report That Aims to Make the Rail Budget History

India may soon end its 92-year old tradition of presenting a separate Railway Budget.

The idea was first mooted in a report titled “Dispensing with the Rail Budget,” jointly authored by National Institution for Transforming India (Niti) Aayog member Bibek Debroy and Officer on Special Duty, Kishore Desai. Subsequently, Railways Minister Suresh Prabhu wrote to Finance Minister Arun Jaitley requesting him to merge the Railway Budget with the Union Budget, citing the long-term interest of the railways, and the nation.

“I think we have had our last railway budget,” Bibek Debroy told BloombergQuint in an interview.

On August 10, BloombergQuint had reported that a ‘joint working group’ will be set up to look into the modalities of the merger, and that the group will be either headed by Cabinet Secretary PK Sinha or Finance Secretary Ashok Lavasa.

The Legacy

In 1920-21, Acworth Committee assessed the government’s finances and recommended separation of railway finances, with the objective of ensuring full autonomy to railways for managing their financial and policy requirements. The committee’s recommendations were accepted by the Legislative Assembly, and implemented through the Separation Convention of 1924.

Back then, railways accounted for a significant share in the economy, and was a pre-dominant mode of passenger and freight transport. In fact, the report authored by Debroy and Desai states that in the 1920s, the railways accounted for around 50 percent of overall revenue of the government of India.

Acworth Committee also anticipated that the railways would evolve as an independent commercial entity, subject to general control of the government.

Politicisation of Rail Budget?

The existence of a a separate railway budget has led to politisation of railway’s affairs, according to Debroy and Desai’s report.

“…(wide following of Railway Budget) precisely because of this visible national attention, the Railway Budget started becoming more a political platform to project a populist, pro-common man image of the government of the day, rather than as a tool to address the Railways’ fundamental concerns.”  

Newer train routes, increasing stops for existing trains, and resistance to increasing fares added further pressure on railways.

The department not only pays for its employees’ wages, pensions and working expenses, but also bears the cost of fulfilling social and public service obligations like running on non-profitable routes, and providing subsidies to various sections of passengers, the report added.

The central government provides gross budgetary support to railways for meeting its capital investment needs, but also takes away a portion of its resources in the form of dividends. Dividends that railways pays to the union government is a “misnomer”, the report said, adding that such payments represent repayment of interest on debt extended by the government to the railways, the principal of which never gets extinguished.

“The dividends (paid by railways to the union government) have to go” Debroy, told BloombergQuint. In the report, Debroy and Desai argue that having a separate budget neither addresses Railways’ funding requirements, nor has it made it accountable for delivery.

Is it Legally Possible?

The constitution does not mandate a separate budget for railways. Even though the Railway Budget is presented separately, the receipts and expenditure of the department are a part of the overall Consolidated Fund of India, the report highlighted.

Disadvantages of Merging Budgets

If the Railway Budget is indeed merged with the Union Budget, the report warns that the railways department will lose flexibility to raise capital funds through extra budgetary sources, such as institutional investors and pension funds.

There’s also a potential political roadblock. The report highlights that any attempt to phase out the Railway Budget may face political resistance, since the budget is an opportunity for governments to flaunt their pro-poor credentials.

Impact on Fiscal Deficit

Currently, the net impact of the funds that the railways raises through institutional funds and other sources, gets accounted while assessing overall fiscal health of the government.

Merger of the Railway Budget with the General Budget will not change the existing situation from the perspective of overall fiscal space given to railways
Extract from “Dispensing with the Rail Budget” Report

“Borrowing by Indian Railway Finance Corporation is an off-budget item. It does not enter the deficit figures. So, deficit cycle will only be impacted because of pension and salary liabilities,” Debroy said.

The IRFC was created with the intention of shielding the balance sheet of the railways from aggressive borrowing, a senior railway ministry official told BloombergQuint. Only the capital expenditure will be on the balance sheet of the finance ministry, which is the case even now, the official added.

Railways creates net surplus every year, and the gross budgetary support will also remain the same, so there won’t be any impact on the fiscal deficit number, the same official cited above said.

Technicalities of the Merger

According to the recommendations of the Debroy committee, revenue subtracted by the ordinary working expenses will be computed as surplus. A portion of this surplus should be transferred to railway capital funds, and past accruals to railway capital funds should be retained. Balance surplus (if any) should be merged with Consolidated Fund of India.

The commitee also recommends that ‘capital at charge’ should be removed. Capital at charge is the return on invested capital.

The railways will get gross budgetary support from the finance ministry like any other ministry, and this budgetary support will be net-off dividends as capital-at-charge is ended.

Sources for additional requirements for capital funds will be worked out between railways and finance ministry, which will include a mix of market borrowings, institutional finance, public-private partnership projects, monetization of railway lands etc., the report said.

A subsidy sharing mechanism may also be worked out. The proposed Railway Regulatory Authority may formulate principles of sharing subsidies or social costs, and the Finance Ministry and other departments will compensate railways based on agreed rules, the report said.