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Editorial Articles

Editorial Volume-28

Rail Budget Merges with General Budget

K R Sudhaman

yet another colonial hangover has been dismantled with the cabinet recently deciding to scrap nearly a century old practice of having separate Railway budget. It was started by the British in 1924, as at that time rail budgets used to be very large financially.

From next year onwards, rail budget will be merged into general budget just as budgets of other departments. Finance Minister Arun Jaitley is right in saying, there is no justification for a separate Rail budget when allocation for certain other departments like defence, roads and highways are more and yet it is part of general budget.

Nowhere in the world there is a separate rail budget but in India this practice had continued, even 70 years after independence as it gave long handle for political parties to indulge in populism. Announcements in rail budget  seldom get implemented for paucity of resources. Rail budgets had been exploited most during the coalition governments as it gave ample opportunity for populism, particularly to the party holding that all important portfolio. The populism many times costs the economy dearly, besides bleeding the Railways.

The rail budget was separated from the main Budget, following recommendation of a panel headed by British railway economist William Acworth in 1920-21. The rail Budget has had a separate existence from the general budget since 1924 when the British spun it off for a better focus on India’s most important infrastructure network. The Railways then accounted for 70 per cent of the total budget. For the British Railways were important as it facilitated them in troop movements and establishing their control in the entire Indian Peninsula. But today it accounted for mere 15 per cent of the total union budget despite India having largest rail network in the world.

It is therefore certainly a historic step and will help in moving towards minimum government and maximum governance. Global and domestic business sentiment too would get a further fillip and so would the environment for doing business in the country.

The merger idea was recently mooted by a committee headed by NITI Aayog member Bibek Debroy, as part of the restructuring of the Railways. This would help in tackling structural problems faced by the railways.

In fact presentation of the general budget itself, requires reforms. No country has such an elaborate general budget with several booklets, a long winding budget speech in Parliament with several populist measures included.  Some of budget announcements do not see the light of the day during that financial year. In China budget presentation is hardly 10-15 minutes job with government presenting one or two pages of statement of accounts for the concerned year and projections of revenue, expenditure and deficits for the subsequent year. In several advanced economies budget presentation is a low key affair as tax rates are hardly tinkered with.

Only in India tax rates are frequently changed. India is one of the few counties where there is huge tax exemption list. The government loses as much as Rs 5.75 lakh crore annually due to tax exemptions. This is almost equivalent to the fiscal deficit of the country.

The indirect taxes are also tinkered with. Of course some sanity has come to budget making in recent years with government moving towards three or four tax rates. Some stability on direct taxes has now been achieved and with the rollout of Goods and Services Tax, there would be some stability in indirect tax rates as well. 

The 92 year old tradition of separate Rail Budget is certainly a step in the right direction as it has deglamorised the railway portfolio and discourage the leveraging of the Rail Budget for handing over largesse to vote banks. Every year there is demand for more trains, more railway lines and more stations, unmindful of economic viability and technical feasibility. This is one of the reasons for several crores worth of projects have not seen the light of the day for decades. In fact the Rs 1.5-2 lakh crore of rail projects are pending.

Railway Minister Suresh Prabhu is justified in saying that this is the biggest reforms done till date in the sector. The financial autonomy will remain with the railways. The existing financial arrangements will continue and all revenue expenditure, working expenses, pay and allowance and pension will continue to be met by revenue receipts of the railways.

The immediate benefit is that Railways will no longer have to pay dividends hereafter. The railways pay nearly Rs 10,000 crore as dividend annually and this amount can now be put to use for capital expenditure of railways. It will also certainly reduce paperwork and do away with separate passage of appropriation bill for railways. Railways can now adopt rational approach to unviable projects.

Along with this merger, the cabinet decided to remove the distinction between Plan and non-Plan expenditure, a commendable initiative to simplify and streamline decision-making within the government. Year after year, nearly 20 to 30 per cent of plan expenditure remain unutilized due to various reasons including some political making a mockery of this distinction. The idea of merging these two heads of expenditure in the government was first mooted by Prime Minister Economic Advisory Council Chairman C Rangarajan some years back.  It is a positive development as it would help spending money in a more useful and integrated manner. What is the point in continuing with the farce of making huge allocation for plan expenditure when they are not actually spent. Instead the money could be put to better use by spending in areas in which it ought to be.

Another important change brought about is in-principle clearance to advance the presentation of the Union budget to early part of February, perhaps first of the month instead of last day of the month. This is a significant development as this would help in ensuring that the entire budget exercise, which is a three stage passage in parliament, is completed before the end of the financial year. Usually the general budget is presented on February 28 or 29 if it is a leap year and entire budget exercise has to be completed within 75 days of budget presentation. This means the budget will be passed by May 15 as a result government is forced to go in for what is called vote-on-account along with presentation of the budget for government expenditure for two months of April and May in the new financial year. As per the Constitution, the government cannot spend any money from the consolidated fund of India without getting Parliamentary approval. Since the budget passage with nod for finance bill is completed only by May 15, government will have to seek temporary approval by way of vote on account for spending in April and May until the passage of the full budget. This also meant delay in implementation of the plan and spending proposed in the budget. So by completing this budgetary exercise before March 31, government will now be able to implement its budgetary plans from day one of the new financial year that starts on April one. This will ensure that government does not lose two months of precious time in implementing its planned projects in the new year. The first stage of budget passage in Parliament is the approval to vote on account. The second stage is passage of demands for grants by various ministries and departments and third and final stage is the passage of finance bill, which provides for various new taxation measures in the budget.

At the turn of the century, the then NDA government led by Atal Bihari Vajpayee did away with budget presentation at 5 p.m on the last day of February. The then finance minister Yashwant Sinha advanced budget presentation to 11 a.m ending yet another colonial practice to suit the British masters. Presenting budget at 5 p m meant it was around noon in London, a convenient time for the British, but not for Indians in India.

By subsuming the Rail Budget in the general budget, the railways would be in a better position to raise funds, from elsewhere including foreign on the strength of the sovereign to invest in projects having long gestation period. It would also help in bringing about structural reforms in the Railways. Only thing the government will have to ensure is that the operational autonomy of Railways is not compromised as feared in some quarters. Along with this merger or rail budget, the government decision to advance the general budget presentation and doing away with the distinction of plan and non-plan expenditure should lead to better planning and spending outcomes in the entire financial year by various ministries and departments.


(The author has over 40 years of experience in journalism. He was Editor in Press Trust of India and Economics Editor in Financial Chronicle. email:<sudhaman23@yahoo.co.uk Views expressed are personal)