Fare hike crucial for revenue target

The rail fare hike may have been an unpopular move but by doing so, Railway Minister Sadananda Gowda will be able to achieve the revenue target set out in the interim budget for 2014-15, presented in February. This will also help the Railways make better allocations for key funds. In the last interim rail budget, which did not go for a fare hike, no allocation was made to the capital fund. responsible for asset creation and debt repayment. In an ideal situation, Railways' revenue surplus goes to the capital fund after paying dividend and a small or no allocation to this fund points to poor financial health of the Railways.

Except for the politically sensitive Pension Fund, appropriation to all other funds has been near static. Appropriation to the Depreciation Reserve Fund (DRF) actually declined marginally from Rs 6,520 crore in 2011-12 to Rs 6,500 crore in 2013-14; appropriation to the Development Fund (DF) also slipped from Rs 3,568 crore to Rs 2,675 crore during the period. Appropriation to the Pension Fund jumped 32 per cent to Rs 23,700 crore in 2013-14.

In the interim budget, the Railways had set a target to earn Rs 45,255 crore through passenger operations. This was an increase of 20 per cent from the revenues earned last year. But with falling passenger volumes, there was no way the Railways could have achieved the targets or even come close to them without the hike. Finance Minister Arun Jaitely on Saturday said in a social media post: "India must decide whether it wants a world-class railway or a ramshackled one. The railway minister has taken a difficult but a correct decision."

For the first two months of 2014-15, railway passenger revenues grew by about 15 per cent, while volumes dropped by about one per cent. The passenger fare hike of 14.7 per cent will add Rs 3,500 crore for the remaining year. The Railways could end up clocking Rs 40,000 crore from passenger operations by the year-end if one simply adds last year's earnings to the extra cash from the fare hike. This is still over Rs 5,000 crore short of its interim budget target. Though revised budget targets for passenger earnings are usually lower than the initial ones, they would have fallen short miserably, making a fare hike inevitable.

In 2013-14, the earnings grew by over 14 per cent on a yearly basis. This was after rail fares were raised up to 25 per cent in January 2013 and by about 3.5 per cent in October 2013. The Railways could have added about Rs 7,000 crore through these hikes in 2013-14 but for a six per cent drop in expected passenger volumes. The increase in earnings in 2013-14 over the previous year was, therefore, just Rs 5,582 crore.

The freight operations will prove to be a silver lining. The increased cargo rate will add about Rs 5,300 to its revenues. The Railways set a loading target of 1,101 million tonnes expecting earnings of Rs 10,5770 crore, a growth of about 11 per cent in revenue and 4.5 per cent in volume. Though for the first two months, the Railways' freight earnings grew by only 5.76 per cent, April-May are traditionally low-earning months. A similar trajectory was seen last year, but the Railways surpassed budget targets and earnings grew by over 14 per cent.

The freight earning targets for 2013-14 require a growth of 11.4 per cent which was much lower than the 14 per cent growth seen last year. On the freight side, the hike will help in a better performance than the budget targets.

On the expenditure side, the higher fuel bill is to be blamed for guzzling the extra cash generated by the hikes. The ordinary working expenses are expected to shoot up by Rs 13,589 crore to Rs 110,649 crore in 2014-15 against Rs 97,060 crore in 2013-14. "The losses on the passenger side have more than doubled to Rs 26,000 crore in 2013-14 from Rs 12,000 in 2004-2005. If there would have been no hike, the losses would have jumped to about Rs 29,000 crore in a year, leaving no surplus for the Railways," said J P Batra, former chairman of the Railway Board.