Lumbering along towards a puff-out

IF THE Railways were a company listed on stock markets, its share price would have tumbled after Mr Ram Vilas Paswan’s performance as its chief executive officer. It is not yet a BIFR case, but is heading in that direction.

The Railway budget confirms that infrastructural shortages could strangle India’s economic growth in coming years. Plunging finances (see table) mean the Railways cannot invest as much as India needs. The consequent traffic jam will hit agriculture, industry and exports.

The operating ratio of the Railways is the ratio of expenses to revenue, and any rise here indicates trouble. The operating ratio was 82.5 per cent in 1995-96, but will rise to 91.4 per cent next year.

This has squeezed net railway revenue (the equivalent of profit before depreciation and interest for a corporation). This will fall from from Rs 4,135 crore in 1995-96 to Rs 2,720 crore in 1996-97.

Since the Railways are still growing, Mr Paswan should have raised the depreciation provision correspondingly. Instead he has cloaked his financial plight by reducing depreciation from Rs 2,115 crore to Rs 2,000 crore next year. But he cannot similarly fudge his rising financing costs.

The Railways have no equity, and are funded by a quasi-loan called capital-at-charge. This bears a fixed charge of 6.5 per cent which is misnamed a ‘dividend’, though it is more like interest on the quasi-loan. This payment continues rising while the surplus sags.

So, naturally, the surplus left for reinvestment is shrinking fast. The allocations for the Railways’ capital fund has more than halved from Rs 2,573 crore in 1995-96 to Rs 1,024 crore in 1997-98.

To overcome the cash crunch, the Railways have floated bonds at 10.5 per cent tax-free (or 16 per cent taxable). The Railways are also availing of lease finance through BOLT schemes, but leasing finance costs at least 16 percent.

This would be sustainable only if the Railways’ rate of return exceeded the increasing cost of capital. Unfortunately, the trend here is ominous. The ratio of net revenue^ to capital employed has shunted from 15.2 per cent in 1995-ro to an estimated 8.9 per cent next year, too low to service even tax-free bonds.

Today, the government borrows money at 13.85 per cent. If this is invested in Railways that earn a return of only 8.9 per cent the revenue deficit of the government will keep widening. If this continues, the Railways will eventually fall sick, and then the government itself.

There is still time to stem the rot, but Mr Paswan does not want to. Although the Railways have 500,000 surplus workers, he boasts in his budget speech that he will give permanent jobs to 56,000 casual workers.

As a shareholder in the Indian Railways, I would vote for a new chief. Alas, the votes of small shareholders have never mattered, have they?

DECLINE AND FALL OF PASWAN’S EMPIRE
1995-96
Actual
1996-97
RE
1997-98
BE
Operating Ratio (%) 82.5 86.3 91.4
Net railway revenue (Rs crore) 4,135 3,756 2,720
Dividend (Rs crore) 1,264 1,515 1,630
Return on capital (%) 15.2 12.2 8.9
Capital fund allocation (Rscrore) 2,573 1,891 1,024

What do you think?