Railway Minister Suresh Prabhu ended a prolonged period of underinvestment in the Indian Railways by proposing a massive 52 percent hike in plan spends, and promises of more in the remaining years of Modi's five-year term

Suresh Prabhu has produced a Rail Budget for 2015-16 that is designed to make the Indian Railways one of the key drivers of the India Growth Story over the five-year term of the Narendra Modi government. With the first year more or less gone, Prabhu has four years to deliver.

He is planning to do this by dramatically increasing investments in freight and passenger capacity, including safety and speed. He wants to expand passenger capacity by 43 percent to 30 million daily; increase track length by 20 percent; and boost freight handling capacity by 50 percent to 1.5 billion tonnes.

It’s about making the Indian Railways a third larger in just one term of office of the NDA government.

Prabhu underlined his serious intent by proposing a sharp push-up in plan expenditure by 52 percent in 2015-16 to Rs 1,00,011 crore. The centre is footing 41.6 percent of this bill, internal profit generation will yield 17.8 percent. The rest will come from borrowings and unconventional sources, including equity contributions from states keen on enhancing their own rail infrastructure.

The higher investment requirements will be met – at least this year – not through an increase in passenger fares, but higher freight that was not really mentioned in Prabhu’s speech. The fine print suggests that Prabhu will be raising more freight revenues not through a general increase in goods carriage tariffs, but by subtly reclassifying cargo categories and distance slabs to generate more revenues from the same basic freight rates. Smart.

The breast-beating will begin later, when railway shippers realise whom these reclassifications will bite.

But the larger message of Prabhu’s rail budget speech is simple. It is a statement of intent by the Narendra Modi government that it will kickstart growth through higher public investment. Prabhu has delivered a part of that promise by raising his plan spends. Prabhu has delivered a slight increase in plan spends for 2014-15 as well – 0.5 percent more than budgeted at Rs 65,798 crore despite a half percentage point drop in gross traffic receipts at Rs 1,60,165 crore over budget estimates.

Despite this, Prabhu has produced a surplus of Rs 7,279 crore after increasing appropriations for the pension fund and depreciation, thanks to lower fuel prices and “better financial management.”

For 2015-16, Prabhu has proposed a significant increase of 16.7 percent in passenger traffic and an 85 million tonne hike in freight traffic, to generate gross traffic receipts of Rs 1,83,578 crore – up 15.3 percent from 2014-15.

Given that this year he may miss his freight traffic numbers (Prabhu had hit 73 percent of his revised target till December 2014), it is anybody’s guess whether Prabhu will be able to significantly improve on his performance next year, when freight rates will be higher for many users. But higher freight rates gave him higher revenues of 14 percent in 2014-15; next year should be no different, especially if the economy starts turning around.

But the real message of Prabhu’s message goes beyond the numbers. There are both political and economic signals emanating from it.

First, the Indian Railways plan to become more consumer-focused, both towards passengers and freight customers. This is apparent from the number of passenger amenities Prabhu announced, including better food, cleaner toilets, better safety and security, better stations, more coaches per train, etc. For freight customers, the promise is speed, better logistics handling capacity, freight rebates for areas with low loading potential, and a revamped private freight terminal policy, among other things.

Second, the railways will invest heavily to boost both their own revenues, and the country’s growth. The cycle of underinvestment in the railways is coming to an end. A four-year investment plan, co-terminous with the NDA government’s tenure till 2019, proposes investments of Rs 8,56,020 crore, the bulk of it for network decongestion and expansion (over Rs 3,92,000 crore between them), and significant investments in safety, rolling stock, and station redevelopment (all above Rs 1,00,000 crore each). High-speed rail and elevated corridor gets Rs 65,000 crore.

Third, resources will be generated for growth and investment both through support from the general budget, and new borrowings, especially from pension funds and insurance companies which have a longer-term horizon. Prabhu said that he expected more money to be raised through market borrowings, leveraging the balance-sheets of the railway production units (coach, wagon and engine building units, among others), and contributions by state governments to equity in projects where they are expected to partner with the railways.

Fourth, formal populism has been abandoned and reform and rejuvenation are the way forward. For what may be the first time ever, no new railway lines or trains were announced. The focus was entirely on upgrading existing infrastructure by increasing the carrying capacity of existing lines through gauge and track changes, doubling or quadrupling lines on key routes, increasing electrification, raising average train speeds, and completing projects that were in their final stages. Politicians may not appreciate this attention to detail, but management gurus would. Past, present and future investments are being made more productive.

Fifth, it is crystal clear that Modi has no thoughts about tinkering in any way with the ownership of the railways. There is no move to corporatise the railways, nor is there any major talk of privatising the core operations of train or wagon operations. At best, private partnerships will be invited in ancillary activities like station improvements, wagon purchases, and logistics.

Prabhu’s is a technocrat’s budget, driven by the need to push investments and set the finances of the organisation right over a medium-term timeframe and make the system self-financing. And yes, Modi wants the railways to be an important engine of growth.