Railway capex budget rules encourage finance ministry to expand model

National transporter is managing its expenditure better after Ministry brought in a new model

Encouraged by its success in getting the Railway Ministry to better manage capital investments, the Finance Ministry could extend a unique model developed this year to other ministries that will have large targets in the upcoming Budget.

For transparency and long-term planning in capital investments by the Railways, the Finance Ministry instituted a system of Memorandum of Meeting (MoM) in Financial Year 2023-24 (FY24). It was a new approach to bind the Railway Board, the top-decision making body of the national transporter, to plan how it would spend the Rs 2.4 trillion provided in Budget FY24 for capex. Of the approximately Rs 10 trillion the Budget provided for capex, the Railways got the largest share.

“The document (MoM) is a first time exercise and we could replicate the model with other ministries when their capital expenditure budgets become huge,” said a government official aware of the development.

The MoM is structured like the Memoranda of Understanding (MoU) the department of public enterprises writes out with key public sector undertakings. As of FY21, there were 124 MoM with annual score sheets based on the parameters laid down in the MoU.

The MoM with the Railway Board has two key terms: One, the expenditures are allocated with a time period of more than one year. Two, the sums finalised in the document shall not be changed. The terms are necessary as actual outcomes compared to the budget estimates each year have often been substantially low (see table 3).

The document was rolled out in July after meetings between Railway Board members and the Finance Ministry this summer.

The detailed monitoring has saved money for the Railways. The Railway Board was in November able to offer financial leeway for the quick rollout of Kavach, the advanced safety mechanism for trains. A circular issued last week said a request for delegating more powers to the Director General, Centre of Excellence (CoE), IRISET, which is leading the research on Kavach, has been approved. It was “under consideration in the Board's office” earlier. This is quite different from the trend in the later half of the year when money is usually withdrawn from departments to cut costs.

First time

The Finance Ministry started the MoM system because of the enormous size of the Railway capex to be financed as gross Budget support in FY24 (Table 1). The Railways in FY23 had a capex of Rs 2.45 trillion, of which a third came from its own borrowing. The picture changed in FY24 when borrowings plummeted to just 6.5 per cent of total Railways capex. Instead, there was a 51 per cent year-on-year increase in the gross budget support the government provided to the Railways.

The MoM system also became necessary as the Railways had reached the limit of how much it could borrow on its own balance sheet from the markets. Such financing, through the Indian Railway Finance Corporation, is ring fenced by leasing out railway rolling stock. This head room is practically over. FY24 budget numbers show payment for interest and principal will account for 17 percent of the revenue receipts of the Railways, almost double from FY16. A Comptroller and Auditor General (CAG) audit has pointed out that even these charges are being met from the gross budgetary support provided by the Finance Ministry. The latter has therefore thought it prudent to hold wide ranging consultations with the members of the Railway Board on granular details of the spending plan.

The Finance Ministry’s meetings with Railway Board members parsed through the transporter’s expenditure plans. In previous years, the Board would offer the government a list of projects where it would wish to spend the money. This had been the practice since FY18, when the Railway budget was merged with the general budget. Details, including zone and division wise expenditures, were left to the discretion of the Board. The time frame was set for one financial year.

Arunendra Kumar, a former chairman of the Railway Board, told 'Business Standard' that since the Finance Ministry holds the purse strings, it is not surprising they will wish to monitor the outcome. “The details of the project, however, should be the work of the Railway Board, in my opinion,” he said.

But this time, the MoM has got into those details so that even the budget for each zone, division and the corresponding departments have been drafted in these meetings. The money has been matched to the level of outcome sought to be achieved and just no wiggle room provided to change the course of action. (See table 2)

This approach has made the task of the Board harder. The Railways is grappling with shortages in financing its revenue expenditure. But there is no room to make up for shortages in those with temporary accommodations, to be reconciled when the actual spends are compiled. In FY22, Rs 15,310 crore of capital budget remained unspent (CAG audit), to make up for revenue expenditure. The Finance Ministry hopes this oversight will ensure delays in completion of projects will come down sharply.

A report by the statistics ministry shows that out of 173 Railway projects with a budget each of Rs 150 crore, 76 per cent have seen cost escalation. This includes the ambitious dedicated freight corridor projects. Their combined revised cost is Rs 1.02 trillion, a 263 percent rise over their sanctioned cost of Rs 28,181 crore.