Good...for now

Lalu Prasad's third railway budget formally brought to the notice of the country what has been known for some time now. The Indian railways have seen a remarkable change of fortunes over the last year. This is reflected in the huge difference between the growth in revenues in the revised estimates for 2005-06 (15.5 per cent) and the growth in operating costs (a mere 5.4 per cent). This has resulted in an enormous improvement in the operating ratio, the basic measure of the efficiency of the system, from 91 per cent to 83.7 per cent, leaving a relatively large residual for the railways to put to good uses, like investment in infrastructure and safety. Mr Prasad expects the good times to persist next year, although with a bit of moderation. He has budgeted for 9.6 per cent growth in revenues versus an 8.9 per cent increase in operating costs, leaving the operating ratio at a marginally worse 84.3 per cent, but still at a healthy level.

Two factors are responsible for this surge, one internal and the other external. The internal force is an unmistakable improvement in physical efficiency parameters, involving both greater loading of wagons and quicker turnaround of rakes. These have contributed directly to better top line and bottom line performance. The longer-term consequences of heavier loads on track quality and consequent threats to safety have not been given much attention so far. This may well come back to haunt the system, but meanwhile, Mr Prasad certainly deserves a pat on the back and perhaps a panegyric or two for his ministry's achievements. Of course, there is a certain irony to the fact that the railways have revealed the benefits they received from increasing wagon loading a few days after the Supreme Court ruled that this was an unacceptable practice for the trucking industry because, among other things, it caused damage to roads, which is against the public interest.

The external factor is the surge in manufacturing activity, the sector as a whole being estimated to grow at over 9 per cent during the current year. While the railways have proved to be equal to the task of accommodating the increased demand for transport services, they must realise that their relatively heavy dependence on this factor makes them vulnerable to a slowdown, which, however moderate, is inevitable after the handsome run of growth over the last three years. Under the circumstances, many of the measures that Mr Prasad unveiled in his budget, particularly the various fare and freight rate reductions, while consistent with the competitive environment in which the railways find themselves, do not do very much for the financial robustness of the system. If business declines because of a slower-growing economy, financial pressures will inevitably return and most likely disrupt the flow of critical resources to investment activity.

The threat is not immediate, if the majority of growth forecasts for the coming year are to be believed. In that sense, the budget estimates for the year look realistic. However, in the interest of sustaining a minimum level of investment year after year, more radical measures to put railway finances on a firm footing could have been wished for. In their absence the railways remain vulnerable to external forces, economic and political.