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Why does India have a separate Railway Budget

By Deepak Parvatiyar

July 14, 2014

The Economist described it as a “bizarre system introduced by the British colonial government” that makes India the only country to have a separate budget for its railways. But political expediency requires a separate railway budget, every year. What are the compelling reasons? Let’s find out.

On June 20, when the Narendra Modi government announced hike in the passenger as well as freight fare with effect from June 25, it did not wait for the railway budget that was due to be introduced in Parliament in less than twenty days’ time.

The Indian Railways Act, 1989, empowers the Central government to fix fares, freight rates and other charges and also empowers zonal railway administrations to quote special rates and contractual freight rates. Similarly, trains can be introduced or extended by routine notifications. At any rate, railways’ revenues accrue to the Consolidated Fund of India and the Union Budget includes the rail budget revenues and expenses. The demands for grants are included in the General Budget, for Parliament’s approval of expenditure from the Consolidated Fund.

However, the convention of seeking Parliament’s approval for tariff changes through the rail budget could be a reason for Railway’s irrational and debilitating tariff structure. In retrospect, heads have rolled following announcement of fare hikes in the railway budget. It was just about a couple of years ago, in 2012, when the then railway minister Dinesh Trivedi was booted out of office by his party, the Trinamool Congress (which was then an ally of the United Progressive Alliance government ), for raising fares. More than any economic consideration, he was forced to quit because of a decision guided by brinkmanship bordering on populism and political predilections.

As it is, expedient politics has ensured that over the years the status of Railway budgets got reduced from being a vision document to being merely an income and expenditure account of the ministry! It has become an important tool in the hands of the ruling dispensation or an influential political ally of a coalition government, to gain mileage by announcing concessions for its core constituencies – whether in form of introducing unviable new trains, or fudging accounts to show surplus budget so as to accommodate unremunerative projects, unviable schemes and cross subsidies to consolidate the political base at the cost of economic prudence.

A separate Railway Budget – a necessity for the Britishers 

We must understand that for the British, a good rail network was necessary to rule the country. It was the largest British project in India and while it changed the fortunes of the British mercantile class and also had a cascading effect on Indian economy.

Given the huge potential of the Railway and its revenue base, the railway finances were separated from the general government finances in British India in 1924 following recommendations of a 10-member William M Ackworth Committee in 1920-21, that recommended “the railways should have a separate budget of their own and assume responsibilities for earning and expending their own income”.

It made sense then because in 1924, the railway budget formed about 70 per cent of the country’s budget and by making it separate allowed better focus on each budget’s priorities. Even during the post-independence era, say from 1951 onwards, the railways accounted for 75 per cent of public transport and 90 per cent of freight.

Is a separate railway budget required even today?

Things have changed now though, as the Railway budget now is less than 15 per cent of India’s national budget and commands less than one per cent of the government’s revenue receipts and disbursements. Given the present day fall in the railway standards, a fresh debate has arisen over whether Defence or Oil sector should also have their separate budgets. The argument is based on the statistics that show that in 2012, while the railway was allotted finances worth $12 billion of the total general budget of $296 billion, the finances allocated to defence and oil sector were much higher at $38.6 billion and $14 billion, respectively.

Yet, besides the perspective of political expediency and economic viability, the debate to do away with a separate Railway budget was revitalised also when a Central Administrative Tribunal recognised such a need in its order in 2010. The CAT order pertained to the plea of a retired Indian Railways official that his pension entitlement should be more than what the government had approved on the ground that the railway ministry presents a separate Budget to Parliament and, therefore, CAT should direct it to earmark additional funds to meet the higher pension liability arising out of his plea. While the Patna bench of CAT dismissed the plea, it added by way of obiter dicta the need to dispense with the system of presenting a separate annual Budget for the Indian Railways.

It is true that the Patna bench of CAT qualified these pronouncements as obiter dicta and not an order immediately prohibiting the presentation of a separate Railway Budget, until the government examines the Constitutional position and amends the law. But this is also true that there have been many high powered expert committees and groups that too have called for the corporatisation of Indian Railway. As far back as in 1947, the Kunzru Committee was the first to suggest the corporatisation of the railways. It was further emphasised by the KC Pant Committee and the Rakesh Mohan expert group as well in 2001.

With no coalition compulsions now, as the government sits comfortably with absolute majority, Railway Minister Sadanand Gowda, did hint at the corporatisation of the Railway when he said the Railway board has become ‘unwieldy’. Yet, the minister did not elaborate much on that.

So should we safely assume that the rest will be told to us by the railway minister, when he presents his next budget, next year?