In a major financial sector reform, India yesterday decided to merge its railway budget with the annual union budget from the next fiscal year, ending a nearly century-long practice and easing the way for the government to cut populist subsidies and push through structural reforms.
The world’s fourth-largest rail network employs about 1.3mn people and pays the government a net dividend of about Rs40bn ($596.81mn) annually.
The practice of a separate railway budget dates back to the days before India’s independence in 1947, when the network was a major industrial asset and revenue earner.
Since then the need for a separate budget has waned, but the exercise has also turned into an opportunity for political parties to press the government to hand out expensive subsidies on passenger fares, and curry favour with voters.
Political heavyweights have used the railway budget to hand out goodies and for their own image building. With the railway portfolio often held by regional leaders, the budget reflected political priorities of the incumbent. The railway bureaucracy had also dug in its heels in the past.
“It should give flexibility to the railways ministry to make its own pricing policy without waiting for parliament approval,” said N R Bhanumurthy, an economist at a Delhi-based think tank, the National Institute of Public Finance and Policy, which is partly funded by the government.
After the merger, the railways will not have to pay the government a dividend, Finance Minister Arun Jaitley told reporters following the cabinet decision yesterday.
India inherited a railway network from the British that was more than twice as long as China’s, and has since grown it by a fifth, to 65,000km. In contrast, China’s rail network is close to double the size.
Subsidies on passenger fares cost more than $4bn a year, analysts estimate.
The decision to merge the rail and general budgets was proposed by Railway Minister Suresh Prabhu and endorsed by NITI Aayog’s member Bibek Debroy.
Both Jaitley and Prabhu clarified that the distinct identity of the Indian Railways will be maintained - including the freedom to raise resources via extra-budgetary means.
“The functional autonomy of the railways will be maintained,” Jaitley said.
“This is a historic step, matching global benchmark. This will help raise capital expenditure in railways which will enhance connectivity in the country and boost economic growth,” Prabhu said.
“The distinct identity of the railways will be maintained. Our effort to leverage extra budgetary resources will continue,” he added.
Railway-related stocks jumped after the news.
Texmaco Rail & Engineering Ltd was up 5.9% in midday trade, Titagarh Wagons rose 3.6% and Kalindee Rail Nirman Engineers stood up 2.6%.
Separately, Prime Minister Narendra Modi’s cabinet also decided to scrap a distinction between plan and non-plan expenditures in the annual budget, Jaitley said.
Categorising expenditures as revenue or capital instead would benefit state spending, said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody’s.
“It would increase the focus on reducing the revenue deficit and enhancing capital spending, setting the stage for improvement in the quality of the fiscal deficit,” Nayar said.
Non-plan expenditure is what the government spends on the so-called non-productive areas, such as salaries, subsidies, loans and interest, while plan expenditure pertains to the money to be set aside for productive purposes, like the various projects of ministries.
Finance ministry officials said after the abolition of the Planning Commission, the relevance of plan and non-plan expenditure was lost - and a better indicator of productive and general expenditure would be a distinction under the heads of revenue and capital.
The government also plans to advance the date the general budget is presented in parliament, usually the last working day in February, to ensure proposals take effect from April 1.
The date for the 2017/18 budget has yet to be decided, however, as authorities have to work around state assembly elections, Jaitley added.
The Congress meanwhile questioned the move to merge the budgets and said the focus instead should be on bringing about a turnaround in the railways.