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irse
Forum Admin
India
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 Posted - 07/25/2009 : 00:49:22
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http://www.centralc hronicle. com/viewnews. asp?articleID= 10667
Friday, July 24, 2009
An interesting debate between the former Railway Minister Lalu Prasadji and the present one Mamata Banerjee has ensued on the quantum of "profit" Indian Railway (IR) has earned during the five years of Laluji's rule. The latter has challenged the claim by Mr. Lalu Prasad, rather his former Officer on Special Duty (OSD) SM Kumar that IR had earned a "profit" of Rs.90,000 crores and there are talks of a "white Paper" on the "profit " earned by IR. The present administration says that the balance with the Railways now was to the extent of only Rs. 8371 crores, a far cry from the Rs. 90,000 crores.
One feels that this debate is entirely uncalled for because it is not realized by either side that IR never uses the terms "profit" or "loss" in its accounts. The terms used are "excess" or "shortfall".
There are good reasons for using such terminologies, but for us to understand it, we have to go back to September 20, 1924, when under the tutelage of the railway boss Ackworth, the general and railway budgets were "separated".
We, however, will have to appreciate the background for this action by Mr. Ackworth. In the 19th century, after the "rail mania" in, England, business toyed with the idea of starting railway lines within the Indian Empire. They would raise the capital in England in pound sterling and then invest them in India to build railway lines and run a railway system. The only condition before the British Government was that it should guarantee a compensation of five percent on the losses these companies would suffer in India, an unknown territory so far as business was concerned. This was agreed to.
It so turned out that the business of the railway companies incorporated in England faced a boom in India and railway people in this country became prosperous and lived a luxurious life. Soon the British Government itself built the railways and took over the railway companies such as the Great Indian Peninsular Railway (GIPR) and the East Indian Railway (EIR).Ultimately, till up to 1946 most private companies were taken up. The last to be taken over by the Government was the Bengal Nagpur Railway in 1946.
In the process by the 1920, it was found that the railways, system constituted a major portion of the annual budget and Mr. Ackworth found that it would be better to separate the railway budget from the general budget. Thus on September that year the separation took place.
It was decided that the Centre would advance money every year to the railways for building new lines and running the system, but it would have to pay interest on it to the general revenues. The quantum was to be fixed by a convention rather than an act of the Central Legislature (now Parliament) since it was felt otherwise every year the act would have to be amended in the legislature. In order to obviate this inconvenience, it was decided that the interest rate would change according to a convention. That is why the measure was called the "Separation Convention".
The British left long ago and Mr Ackworth too is no longer alive. However, the system he had evolved is still in vogue today and it is necessary to remember the genius of that man even today.
One has to realize that setting up a railway system is an expensive affair and it is not possible for a department of the Government of India such as the Ministry of railways to finance railway projects and run them profitably .It is not realised even in these days of economic boom, IR to continues depend upon the centre - the Ministry of Finance - for meeting the capital costs of new schemes .It receives every year an amount for this purpose, known in common parlance as budgetary support However, it is anything but a grant as commonly understood. This amount is described as an "interest bearing loan in perpetuity". Yes, interest bearing loan the interest is known as dividend, the rate of this dividend is fixed by convention as was will by Ackworth, through a Railway Convention Committee appointed at the beginning of every term of the Lok Sabha. The new Convention Committee is yet to be elected.
It has to be realised that the interest, known as the dividend, has to be paid to the Ministry of Finance and is not a punishment as was made out so far. This is a legitimate due for the Union Government. This amount can be deferred by Railway Ministers as was done in the past years by those preceding Mamata Banerjee but the amount has to be paid. Laluji had cleared all dues till last year and Mamata too has cleared the dividend due this time instead of deferring it as in the past because of the new laws regarding financial transactions.
What happens to the "budgetary advance" since only part of it is paid back by railways in the form of dividends? It becomes the Capital-at-Charge. So, while reckoning the "profit", it is necessary to refer to the capital-at-charge and not the day-to-day incomes and expenditures- the revenue accounts or the shopkeepers accounts-.
The capital in charge as on March 31,2008 was Rs.63,980.81 ( Explanatory Memorandum-page VIII-2) while as on March 31, 2010, it will be Rs.86,237.98 crores. With such a large capital-at-charge, how does Rs. 60,000 crores in five years matter. In the form of profit? The profit, as far this reporter (not a commerce or economic graduate but a science student) has to be related to the volume of the capital that has been invested by the Government of India from out of the taxes and borrowings.
It is interesting to read the accounts of haggling the Railways had engaged the Government while opposing the increase of the rate of dividend from six and a half per cent to seven per cent, involving only about Rs. 150 crores. (Sixth report of dividend for 2007-08 and other ancillary matters, presented to Parliament on 26.4.2007).The Ministry of Finance seeking restoration of the rate-of-dividend to seven per cent had stated.
The Ministry of Railways have been seeking reduction in the rate of dividend paid to general revenues for the fourth year successively on the plea that over the years the Government's average cost of borrowing has been decreasing consistently whereas they have to keep investing for improving infrastructure. This plea is untenable in view of the fact that the weighted cost of market borrowings has been increasing steadily, from 5.71 per cent in 2003-04 to 8.03 in 2005-06. Apart from this, Indian Railways are getting a number of concessions and subsidies in the form of dividend relief. After setting off these concessions against the dividend paid by the Railways effectively translates into about 4 per cent of the total capital-at-charge" .
The relief provided by the rate of dividend and various other concessions/ relief's budgetary support provided to the Ministry of Railways has been a favourable impact on the Railways finances in these years. Their financial position has vastly improved and surpluses have quadrupled from Rs. 1091 corer in 2003-04 to Rs. 4,338 crores in 2005-06,in a short span of three years. Surpluses are appropriated to the various Railway funds after meeting dividend liability Balances lying with the credit of the Railways also earn interest from the Government.
"Finally, in view of the Fiscal Responsibility and Budgetary Management Act (FRBM) to be achieved by 2008-09 and the need to attain fiscal sustainability by reducing debt while creating fiscal room to fund priority fiscal needs, the proposal of the Ministry of Railways for payment of dividend at the rate of 6.5 per cent to the general revenues is not agreed to. Instead, Railways may pay dividend to the General revenues at the rate of 7 per cent on the capital-at-charge" .
Not prepared to give up, the railways countered this argument by saying that (a) Railways pay dividend in perpetuity whereas the borrowings of the Government have a fixed tenor; (b) concessions in payment of dividend termed subsidy are in fact mostly a legitimate. Grant due to the railways recognizing investments undertaken by Railways in projects and development expenditure that are un-remunerative and economically unviable and yet important for national development. Most of these works were taken up only at the instance of the Government itself and the exemption in payment of dividend on them is available after due deliberation as per the recommendation of the railway Convention Committee.
irse
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history & Facts of rail budget
