Jaitley can cash in on Prabhu's rail capex plan to stimulate demand and spur growth in world's sixth largest economy whose growth rate is projected at 6.75-7.5 per cent in FY18 as compared with 7.1 per cent in FY17
India will create history by eliminating the British era Railways Budget this year as it will be merged with the general Union Budget. In a way, the Rs 2 lakh crore worth of spending on the rail sector will be absorbed in the government's Rs 20 lakh crore-Budget.
The Railways Budget is dead. But long live rail capex!
In 2016, Suresh Prabhu had pegged railways capex for FY16 at Rs 1.21 lakh crore. Many projects are being implemented through joint ventures with states and many are on PPP mode with private players.
In fact, Railways has plans to invest Rs 8.56 lakh crore in capex between FY16 and FY20 to lift passenger and freight traffic by about 50 per cent in five years. Daily passenger carrying capacity is targeted at 30 million from the present 21 million while freight carrying capacity is to be raised from 1 billion tonne to 1.5 billion tonne.
The Railways planned to invest Rs 1.99 lakh crore between FY16 and FY20 for dedicated freight corridor, electrification and doubling of tracks, while another Rs 1.93 lakh crore will go into network expansion.
The country’s largest public utility will also spend Rs 1.27 lakh crore for rail safety including track renewal, bridges and signaling and another Rs 1.2 lakh crore for rolling stock—locos, wagons and coaches.
Prabhu's capex plan offers an excellent opportunity for Finance Minister Arun Jaitley to revive the capex cycle and spur demand after the demonetisation drive.
IMPERIUM IN IMPERIO
The Indian Railways, which is the 4th largest in the world, is an empire within an empire. It runs 19,000 trains daily, carrying 22 million passengers and 3 million tonne of freight per day.
While the British build 80 per cent of Railways current network of 66,000 kilometers, there has been a severe lack of investment in railways over the past 7 decades.
This is despite the fact that rail traffic has surged exponentially. Overall, 40 per cent of all railway sections and 65 per cent of the high-density sections are running at more than 100 per cent utilisation level.
Populist measures of holding back passenger fare hikes and expanding trains within the same network has gradually pushed Railways at the brink.
FROM ICU TO RACING TRACK
Railways was in ICU (intensive care unit), according to former Railways Minister Dinesh Trivedi, with sagging revenues and burgeoning expenditure including that for salaries and pension.
The financial health of the aging utility deteriorated with the implementation of 7th Pay Commission.
Last year, Prabhu told BTVi that 7th CPC mandate was a major challenge. “It is going to put tremendous pressure on Railways finances as it would result in Rs 30,000-32,000 crore annual increase in railways cost. It is unbearable.”
Yet, Prabhu did not give up hope. The chartered accountant-turned-politician reengineered Railways finances and actually showed a surplus of Rs 8,479 crore in its books for FY17, which was lower than Rs 11,402 crore of FY16.
Prabhu did lay down a plan to turn a government fund-depended public utility into a self reliance one.
"Indian Railways has battled lack of investments, depleting market share and falling financial health for years. However, a paradigm shift is now underway, manifested in an Rs 8.56 trillion investment plan over 2015-19, which is 1.9 times that of 2000-15," Edelweiss said in a research note.
"Systemic changes like funding from LIC, states, focus on capacity enhancement, accounting overhaul, regulatory reforms, along with likely improvement in profitability post start of the Dedicated Freight Corridor (DFC, first 5 year profits enough to generate funds to create another DFC), lead us to believe that Railway investments will far outstrip those in National Highways over the next decade."
REVIVING PRIVATE CAPEX
While Jaitley reads his Budget speech, a big section of India Inc will be keenly listening for the rail related projects.
Edelweiss believes a "rail revolution" will usher monumental changes in India.
For EPC companies, it will open up an entire new segment for orders. For companies in capital goods, power, ports, cement, logistics and metals and mining space, this will spell better volumes and cost reduction.
"We believe, rolling stock manufacturers, particularly wagon players, will benefit handsomely from IR’s focus on freight operations and start of DFC—45,000 plus wagons are needed in the first 5 years.
In case of rolling stock (or wagons), global and local companies like GE, Bombardier, Siemens, Alstom, Stadler, Kawasaki, Toshiba, Mitsubishi, BEML, Texmaco, Titagarh Wagons and BHEL will vie for a greater share of the pie.
Capital goods major L&T, ABB, Siemens, Crompton, Cummins, Voltas, Bharat Forge and KEC are looking to cash in on the railways capex. So are EPC companies like HCC, NCC, Sadbhav Engineering and Simpex.
A massive electrification drive will draw the attention of power firms like NTPC, Power Grid, Tata Power, Adani Ports, Adani Power and Gujarat Pipavav.
Metals and cement players will be looking for the capex as well as the freight rates.
In a nut-shell, Jaitley can now expand his fiscal stimulus through the railways sector to revive private investment cycle to a great extent.
Jaitley should cash in on Prabhu's rail capex plan to stimulate demand and spur growth in the world's sixth largest economy whose growth rate is projected at 6.75-7.5 per cent in FY18 as compared with 7.1 per cent in FY17.