governance, political economy, institutional development and economic regulation

 

Every hero has a side kick. Sadananda Gowda, the Railway Minister, is to Jaitley, what Mac Mohan “Sambha” was to the lovable “Gabbar” Amjad Khan, sadly however minus Mac’s trademark “skunk” hair dye, in the Sippy blockbuster “Sholay”-

Gowda’s Railway Budget on July 8 is the teaser to Jaitley’s big event two days later. At worst, it is “time pass”. At best, for a reformist government, it can be a trumpet blast of the good things to come.

But the trumpet sounds emerging this year are likely to be muffled. How horribly dated the railway has become, is illustrated by the fact that if you booked your ticket in 2013, a year in advance and left your money, for that period, with the railways, a sharp-eyed, unpleasant looking, Travelling Ticket Examiner may yet turn up at your reserved “berth” (bunk) demanding extra cash, because the Hon’ble Railway Mantri increased the fare on July 8, 2014. This is “retrospective taxation” even the Income tax and Excise boys could learn from.

Why the Railway (IR) has a separate budget presentation beats everyone hollow. The expenditure budget of IR in 2013-14 was Rs 1453 billion around 9% of the expenditure in the main budget. In comparison the expenditure for Defence was 12% of the total and for police an additional 3%.

The government capital invested in IR (albeit dubiously valued) was a mere Rs 2103 billion in 2013-14 on which it earned a net return of a mere 7.4%. Compare this with the government’s borrowing cost of 8%. Even if the capital employed could be fully recovered (which it can’t), it would still only bridge less than half the Fiscal Deficit of the Government of India.

NTPC, India’s premier government majority owned, power generating company, which is listed on the BSE/NSE, has invested Rs 844 billion in its business, on which it earns a net return of 16%.

ONGC, India’s flagship, government majority owned, oil and gas exploration and production company has invested Rs 1017 billion on which it earns a return of 20%.

Both these government “corporates” function perfectly well. They make decent profits under a professional board and without the government’s hot breath breathing down their necks….though even with them, the government could cut back on some of its heavy breathing and let the professionals loose.

Why is the Railways not similarly a corporation, run by a “Sreedharan” clone supported by a board of infrastructure, finance and management professionals? Here is why.

The Railways has spawned a huge “biradri” (community) of railway people since its inception in 1853 in Bombay. Railway officers are divided into four generalist cadres: Railway Traffic, Railway Accounts, Railway Stores and Railway Personnel Management; four engineering cadres: electrical, mechanical, signals and civil; its own Medical Service and its own Police Force. Over 17,000 officers are employed in the higher level Group A and B grades. Indian Rail employs 42% of the Central Government employee workforce or 1.3 million people.

George Fernandez, the erstwhile stormy petrel of the Railway Unions could single handedly block traffic on all its track (115,000 kilometers today) in the 1970s. Luckily, and thanks to the judiciary, those stormy days are behind us now and Unions can no longer hold customers to ransom. But reform is urgently needed.

The single most important citizen budget indicator is the proposed investment in Indian Rail.In 2013-14 the Railway Budget allocated Rs 68 million for depreciation (replacement of capital) and Rs 207 million for pension reserve (the liability on account of workers). IR spent three times more on protecting employee futures as compared to reinforcing its capital assets.

If this continues, disregard dreams of emulating the Chinese; connecting Myanmar to Manipur; Dhaka to Kolkota; Tamil Nadu to SriLanka and building a rail ring in the Himalayas. Talk is cheap. Even just improving the quality of the existing rolling stock; communications and track; reducing travel time and rolling stock utilisation requires a mammoth investment.

Railways is not a people intensive business, at least in terms of direct employment. It is a capital intensive business. Germany invests around USD 7 billion a year to sustain around 700,000 jobs in manufacturing of railway equipment; management and maintenance of urban mass transit rail systems. China invests 1% of its GDP on rail investments.

We budgeted to invest Rs 426 billion in 2013-14 but ended up investing only Rs 384 billion or 0.4% of our GDP. An investment of USD 6 billion was meagre for a developing economy, the size and population of India. But worse, we try and sustain 1.3 million jobs versus our investment needs. Most of these are unproductive “tail not teeth” type of jobs, which need to be replaced with skilled opportunities for our ITI diploma holders, engineers, finance experts and social scientists.

A corporatized IR, freed from crippling politicization, could grow at 15% every year. This would double its scale of operations every five years and create demand for at least 1 million skilled jobs at market rates.

But for now lets’ watch the IR Citizen Budget Indicator of proposed investment for 2014-15

(1) Below Rs 400 billion. Rating: Bad;

(2) Between Rs 400 to 440 billion: Rating good

(3) Above Rs 440 billion: Rating: outstanding.

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