Indian Railways a Social Venture?

Mamta Bannerjee presented a wonderful Railway budget this year with lots of emphasis on improving the railway infrastructure of the country which is coming under pressure due to rising population. Apart from announcement of new trains the schemes for backward areas, budget tickets for students and nonstop trains came as the pleasant surprise this year.

Inspite of all these good announcement there were few sweeping statements made during the budget session, one of them was “Indian Railways are not a profit oriented Enterprise but a Social Enterprise “.I beg to differ on this completely.

No social venture is sustainable unless it makes steady profits and shows a growth in future. I think that we are all now reaping the benefits of the profitability of the Railways in last 5 years. Only when a company makes profit, they can be reinvested and utilized for fulfilling some of the social commitments. No institutions will even lend to the institutions which are disoriented towards the profit aspect of business. A cliché statement but very appropriate for this discussion, “Wealth Maximization should be the ultimate goal for any corporation”.

Another observation about budgets is the lack of visibility on the implementation aspect of the various schemes. The government commits huge sums of money towards the development schemes but lot of funds leaks during the bureaucratic process. I believe we need a new department for reducing the inefficiencies of the various ministries by developing the implementation strategies of various schemes in close coordination with the ministries.

Budget 2009

Sensex may have crashed 600 points after the announcement of the budget, but I still found the budget very responsible although it has fair share of negative policy decisions too .

Positives

1. Government high degree of spending on rural and poor India clearly signals the accountability to the people of the country. They are fulfilling the promises made in the general elections.

2. Infrastructure spending will give boost to the manufacturing industry which is facing trouble due to recession. It will also have increased multiplier effect and will boost the overall economy.

3. Increasing MAT to improve the tax revenues from the company which are avoiding tax due to tax incentives given to them. If we see companies like TCS, INFY, they have established themselves well and don’t really need any tax breaks further. Ideally there should be a limit set on net profits and the time company crosses the limit, it should be taxed as a normal company.

4. Boost to agriculture sector in the form of 7% loan will improve the rural economy further, it will improve the purchasing power of almost 650 million Indians.

Negatives

1. No announcement of disinvestment in both loss and profit making companies is really shocking news. When the country is sitting on huge fiscal deficit and borrowing nearly 34% of the money used for spending, disinvestment could have been a trump card solution which is missed.

2. Imposition of Fringe Benefit Tax was a smart move by the earlier government, by abolishing it tax revenues will be reduced as companies will start paying its employees in the form of benefits and perks to reduce their tax load. This may also increase the fiscal deficit even further.

3. Reducing duties on Plasma TV, Mobile Phones and imported Car - This may be one of the decisions for the galleries, but it really doesn’t help the rising fiscal deficit of the country.

I think the major issue of this budget is clearly the lack of fiscal management by the finance ministry, increased borrowing by the government will cause following effects: -

1. Sovereign Ratings: - Increase fiscal deficit to more than 6%, it may also affect our sovereign ratings and increase the cost of borrowing by the government and the institutions.

2. Crowding out Effect: - Government is borrowing almost 34% of the expenditure from the markets. It will reduce the options for the private sector to get easy funding as it will be competing against the government to secure funds.

3. High Interest Burden: - Around 19% of the budgetary expenditure goes in just paying the interest on the loans taken by the government. High interest burden and increased borrowings is a negative sign for the growth targets of the country.