Concern for funding of Indian Railways
The NDA Government has now introduced a new source of funding called Extra Budgetary Resources-Institutional Finance (EBR-IF) from the financial year 2015-16 to finance railway projects. As a result, Life Insurance Corporation (LIC) will invest Rs.1.5 lakh crore in the railways during five years time. More such innovative funding for investment in the railways is in the offing from other Government entities, institutional finance, and public sector units to enable IRFC to finance and invest in more capacity augmentation of railways.
Development expenditure of Indian Railways in each financial year is funded through annual plan, as announced in the Budget, through three sources, Gross Budgetary Support (GBS), Internal Generation of Revenue from freight and passenger traffic and Extra Budgetary Resources (EBR). The inadequacy of GBS and shortfalls in internal resource generation led Indian Railways to shift focus to EBR, for which Indian Railways Finance Corporation (IRFC) was set up in December 1986, which has raised cumulative funding to the Railways of over Rs. 1.50 lakh crore till the financial year 2015-16. In the current financial year 2016-17, IRFC has been given the target of mobilizing Rs.40,985 crore. As of now, Indian Railways have Rs.1.42 lakh crore of assets mostly rolling stocks, which have been leased by IRFC.
Total investment mobilized by IRFC so far, include components of Tax-free Bonds and External Commercial Borrowings (ECBs), two platforms for cheaper borrowings. Till date, IRFC has raised USD 2,766.40 million, JPY 60.37 billion and Euro 19.53 million through ECBs. IRFC raised Rs.6916 crore in 2012-13 and Rs.8828 crore in 2013-14 under Tax-Free Bonds. During 2014-15, IRFC did not have access to Tax-Free Bonds. In 2015-16, IRFC was allowed to raise Rs.9500 crore as Tax-Free Bonds against a proposal of Rs.Rs.17, 500 crores. For the current financial year 2016-17, Ministry of Finance has been approached for allowing at least Rs.10,000 Tax-Free Bonds.
According to Ministry of Railways, about 97 percent of the funds raised by IRFC are utilized for acquiring rolling stock assets like wagons, coaches, and locomotives, constituting a vital component of Annual Capital Expenditure of the railways. IRFC has, so far, financed 4,045 electric locomotives, 3,753 diesel locomotives, 1,94,700 wagons, 42,872 coaches and 85 track machines and cranes. In addition, IRFC has provided Rs.2,896 crore to rail Vikas Nigam Limited (RVNL) for seven projects. IRFC also funded Rs.2078.49 crore for 90 Doubling and 32 Electrification Projects being executed departmentally by the railways since 2011-12.
However, economists, infrastructural experts, and others believe that the route of borrowings from domestic and offshore capital markets is a sure route to debt trap for Indian Railways. They have been raising their concerns from different forums from time to time. Accordingly, certain issues facing Indian Railways need to be redressed urgently to mitigate growing debt burden.
These include increase in GBS to railways, amendment in the definition of Infrastructure in the Master List of Infrastructure to include rolling stock assets of railways as Infrastructure issued by the Ministry of Finance, exemption from minimum dividend payout as prescribed by Ministry of Finance and linking it to paid-up equity, allocation of Tax Free Fonds by the Ministry of Finance commensurate with IRFC’s annual borrowing target to bring down the cost of borrowings, allocation of 54EC Capital Gain Bonds to IRFC, exemption of IRFC leases from the applicability of the forthcoming GST in the same way as the lease agreements between Ministry of Railways and IRFC. and the abolition of lower withholding tax rate of five percent to Rupee Offshore Bonds to provide a low-cost window for fund mobilization by IRFC for overall development including augmentation, expansion, and modernization of Indian Railways. Unless measures, as pointed out, are taken quickly, the route to debt trap and a total sellout (privatization) of Indian Railways cannot be staved off.