There is nothing wrong with the rail minister’s massive capacity enhancement plan. The problem arises from the mode of financing, which points toward a potential debt crisis
Railway Minister Suresh Prabhu is a chartered accountant by profession and therefore must have a keen eye for detecting a debt bomb in any company balance sheet.
Although the minister appears quite sanguine about the ability of the Indian Railways to finance massive capacity expansion — of the order of Rs.8.5 lakh crore– during NDA’s five-year tenure, the slowing of the economy as well the burden imposed by the Seventh Pay Commission may derail the organisation’s finances. Suresh Prabhu should know this better than anyone else.
Until 2010-2011, when the overall economy was still growing at 9 %, Railway finances broadly worked on a predictable pattern. Former Railway Board chairman Vivek Sahay says of the total expenditure outlay of the Railways at the time, about 48 % would come from the government as budgetary support, about 28 % as internal surplus (profit) generated by the Railways, and the remaining 24 % came from market borrowings. This broad mix was sustainable, according to Sahay.
Look at how the mix of funding sources has dramatically, and dangerously, altered today. The internal surplus has all but disappeared after the slowing of the economy, resulting in low freight traffic growth. If you add the burden of the Pay Commission the future mix of funding sources is likely to be 50 % from government budgetary support and the remaining 50 % from market borrowings since there will be hardly any internal surplus left, says the former chairman, Railway Board.
Worse, this situation is occurring at a time when the NDA has come up with a plan to virtually triple capital outlays over five years. One doesn’t know how the chartered accountant in Prabhu would read the potential debt crisis staring at the Indian Railways.
One doesn’t have any quarrel with the massive capacity enhancement plan of the Railways in terms of expansion of tracks and networks, rolling stocks and safety equipment, among others. The problem arises in the mode of financing. The Railways have borrowed Rs.1.5 lakh crore from the LIC because that is an easy option. One arm of the government lends to another, doesn’t need any due diligence. One would like to see the Railways test the open market with a borrowing of that order. Still, the LIC will have to be paid interest at the rate of 8 % to 9 %. There is no escape from that.
As the former Railway Board chairman argues, in the absence of internal surpluses due to the Pay Commission burden, the borrowed component of the five-year outlay (Rs 8.5 lakh crore) could go up to over Rs.4 lakh crore. The future interest payment on this itself would go up by close to Rs.35,000 crore. So any small surplus that may be generated in the future due to economic recovery will be eaten by the debt servicing burden.
A vicious cycle will follow when borrowing will be done just to pay back interest. This is why the former chairman of Railway Board thinks the heavy borrowings by the Railways to fund its Rs.8.5 lakh crore expansion is fraught with risks. Suresh Prabhu, a brilliant chartered accountant, knows he could not have pulled this off in a private enterprise where the promoters would be scared of taking on such a heavy debt burden. However, in government such worries are not there as the burden is seamlessly passed on to future tax payers.