Sustainable growth?

Rarely does the railway minister announce the day before D-day that he is going to present a good budget. Seeing the revised numbers for the year that is about to close, his upbeat mood is easily explained. The national carrier may well have turned in its best ever performance, with a massive 36.6 per cent jump in net revenue during 2006-07 compared to the budget estimate made a year ago. This has been possible because of the 16 per cent rise in gross receipts, while net ordinary working expenses have remained flat, up a bare 0.2 per cent, reflecting the key analytical point that over 80 per cent of railway costs are fixed, and only about 18 per cent is variable on account of fuel. Success therefore lies in traffic growth, which explains why the over-all surplus available for appropriation has gone up by an unprecedented 57 per cent. This is reflected in the operating ratio (expenses to revenue) dropping to a historic low of 78.7 per cent; as recently as 2004-05 it was 91 per cent. Another key ratio, the net revenue to capital at charge (the railways' equivalent of return on equity), has risen to an unprecedented 19.6 per cent""more than twice the 8.9 per cent recorded in 2004-05. Somewhat intriguingly, this ratio, projected at 10.7 per cent in last year's (2005-06) revised estimates, has been changed to a final or "actual" figure of 15.4 per cent, which needs some explaining.

What is striking against this impressive backdrop are the relatively modest growth numbers for next year, for both traffic and revenue. This gives weight to the argument that the steps that have been taken in recent years to give the railways fresh momentum (raising the loading limit per wagon, for instance) have run their course and that capacity constraints on the main trunk routes are beginning to block the continued rapid growth of business. The dramatic improvement in the current year's revenue numbers, in relation to the original budget, is also explained in part by mid-year tariff increases that do not hit the headlines, including on items like foodgrains and fertiliser. The hikes may be commercially justified, since these freight items have traditionally attracted low tariffs, but greater transparency on pricing decisions is in order.

In his budget for the new year, the minister has offered marginal fare cuts for air-conditioned travel, which suggests that he is keeping a wary eye on the competition posed by the budget airlines. He has also offered a more substantial cut in freight rates for petroleum products (5 per cent) and bulk commodities like steel and cement (6 per cent). These cuts are justified in that the railways' rates for bulk commodities compare unfavourably with some of the competition, but if capacity constraints are coming into operation, the case for dropping tariffs can be questioned. Indeed, the focus should be on increasing container traffic, an objective which has met with quite a lot of success in recent years. What is clear is that if the current traffic growth rates are to be maintained, the railways will have to jack up investment in line capacity and rolling stock. The investment plan for the new year is ambitious, and the annual plan for next year has been set at Rs 31,000 crore, up 32 per cent on the current year""and this is exactly what the doctor would order when the need of the hour is fresh capacity creation. A small part of that money will go towards building the new freight corridors; it must be hoped that these will be completed as quickly as possible.