Don’t merge rail and general Budgets

The merger of the Railway Budget with the General Budget is once again making a buzz. It is learnt that the Railways Minister has accepted the recommendations of the Bibek Debroy committee.

Agreed, a practice started 90 years ago should be reviewed. It may be relevant to recall the factors that led to the separation in 1925.

The Railways were in bad shape at the turn of the last century. The 36,735-mile route was pulling in different directions. There were state lines worked by the state, state lines worked by guaranteed or independent companies, company lines worked by companies, and lines belonging to the princely states. The Railways failed to meet the demand from passengers as well as trade. The facilities were utterly inadequate. Goods rotted on the platforms as there were no wagons or locomotives to move them. Overcrowding and waiting for days at stations was quite common. The main reason for such a state of affairs was the non-availability of funds for expansion, development, and repairs and maintenance.

Even though the railway revenue formed a major portion of the government revenue, the Railways were starved of adequate funds. In times of bad harvest and trade, when the revenue fell, the budget allotment to the Railways was the first casualty.

The cut in expenditure was exercised even during the currency of the year resulting in suspension of works in progress and disbanding of staff. Late in the year if the financial situation improved, the finance member with equal suddenness encouraged the Railways to spend more, leaving them little time in which to do so. The system was further battered by World War 1, leading to a clamour from the public — as represented in the Imperial Legislative Council urged through repeated resolutions moved in 1914, 1915, 1917, and 1918 — for the appointment of a committee to enquire into the desirability of adopting direct state management of the Railways and emancipating the utility from the finance department of the government.

In November 1920, a ten-member (three Indians) committee was appointed with Sir William Acworth as chairman to “go into the whole question of railway policy, financial and administration”. The committee collected evidence and came to the conclusion that Indian Railways “cannot be modernised, improved and enlarged so as to give to India the service of which it is in crying need at the moment until the financial methods are radically reformed” and the essence of that reform according to the committee was complete separation of the Railway Budget from the General Budget and its reconstruction in a form “which frees a great commercial business from the trammels of a system which assumes that the concern goes out of business on each 31st of March and starts de novo on 1st of April”.

This, then, was the beginning of the separation. Speaking in the Assembly while presenting the Budget for 1924-25, the finance member of the council reminded members that “I know of no reform which offers greater benefits to our finances and Railways alike than a definite separation”. This would enable the Railways to spend money according to the real needs of the system unimpeded by the vagaries of the Budget figures and the requirements of the Budget accounting. The separation started with the Budget of 1925-26.

The practice of paying dividend to the general revenues on the capital invested from there continues but the Railways since then have been responsible for earning and spending their own money. Of course they do have to look for budgetary support from the general exchequer as the money earned has never been enough to meet their needs. One reason for this has been their inability to raise fares and freight commensurate with the rising cost of transport.

This politicisation of the Railways came along with Independence and India embracing parliamentary democracy. As a result, the Railway Budget over the years has become more a populist than a commercial exercise. The autonomy envisaged was fettered by not raising passenger fares in line with rising costs. Indeed, passengers are being subsidised by goods traffic.

The Budget has also become an instrument in the hands of several railway ministers to build their vote-bank. All this affected the finances so that today, the Railways do not have adequate funds for expansion, development or replacement of worn-out tracks or rolling stock. Besides, there was the impact of Partition and World War 2.

During all these years of independence, though major landmarks were achieved, Indian Railways still lagged behind in expanding and modernising its network for want of adequate funds. In 1950, we had 54,600 km of track. To this we could add hardly 11,000 km in all these years. China had just 22,161 km in 1950. Today it has over 1 lakh km. Our Shatabadis and Rajdhanis and even the latest Gatiman Express run at a maximum speed of 160 kmph. China has already achieved a speed of 300 kmph with the Beijing-Guangzhou bullet train service.

It is not that our engineers are not capable of reaching those targets. It has always been the constraint of funds. Internal resources were never enough. The budgetary support from the general revenues was always limited. External borrowings through the Indian Railway Finance Corporation could is also restricted. So the emancipation envisaged in the separation of railway finances from general finances was, to a great extent, diluted by inherent flaws in our political system.

While merging the budgets will remove this snag, it will also create parallel problems. The railway revenue will become part of the general revenue but so will the expenditure. In the event of shortfall in revenue or gross receipts in the general budget, will the finance ministry carry out the cuts in Railway expenditure? Certainly not.

There are some regular costs such as staff salaries, fuel, stores and equipment that cannot be guillotined. The sacrificial lamb could again be the modernisation and expansion. The constraint in raising passenger fares would be the same with the finance minister presenting the General Budget as with the railway minister presenting the Railway Budget.

The merger will only make the Railways become one more government department; it will lose its commercial character. There is also a contradiction in the approach of intellectuals who were engaged in studying the organisation. On the one hand, they talk of privatisation of the Railways and on the other, they suggest merging the entity fully into the system, subverting its commercial nature which requires separate treatment of its finances.

It would be better to leave the current nature and character alone and concentrate on strengthening, modernising and expanding the Railways so that it can meet the demands and challenges of transporting mind-boggling numbers of people and goods across the length and breadth of this country.

The writer was executive director of finance, Railway Board