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Behind Lalu's 'surplus' claim: A shift in accounting policy

Behind Lalu's 'surplus' claim: A shift in accounting policy

Author: Raghvendra Rao
Publication: The New Indian Express
Date: September 14, 2007
URL: http://www.indianexpress.com/story-print/216637/

Railway Minister Lalu Prasad's proud declaration, made while presenting the Railway Budget this February, that Indian Railways (IR) would generate a cash surplus before dividend of Rs 20,000 crore in 2006-07 has turned out to be inflated. An investigation by The Indian Express has revealed that the IR 'earned' Rs 2,690 crore - or 13.3 per cent of the declared surplus (Rs 20,153.49 crore) - not by transporting more people or goods, but by changing its accounting procedures.

Replying to a right to information (RTI) application made by The Indian Express, the Railway Ministry has conceded that three accounting policy changes made by IR increased its surplus by Rs 2,689.97 crore in 2006-07. Excluding this amount, the 2006-07 cash surplus would fall to Rs 17,463.5 crore - a smaller increase over the 2005-06 figure of Rs 14,700 crore.

While two of these changes got a line in Lalu's Budget speech, the third - the biggest contributor to the Rs 2,689.97 crore swell - didn't even get a mention. Railway Board financial commissioner Sudha Chobe did not respond to an appointment request or a questionnaire sent by us on the accounting changes relating to three entries:-

Lease charges payable to IRFC (Rs 1,720.12 crore): IR leases rolling stock from Indian Railways Finance Corporation (IRFC) and pays lease charges. Earlier, IR used to book this amount to its working expenses. From 2005-06, though, it started booking the capital component of lease charges as capital expenditure sourced through a Capital Fund. Simply put, as an asset, rather than an expense.

The Comptroller and Auditor General (CAG) of India hasn't agreed to this change. In its 2005-06 report, its latest, CAG said, "The charging of the capital component to revenue was not in order." Further, CAG noted, "Railways needed to appropriate funds to the Capital Fund, from which the capital portion of the lease charges are finally paid, from the surplus available with them." According to the report, the Railways is now considering doing that.

Interest on IR fund balances (Rs 660.85 crore): The Finance Ministry pays interest on the closing balance of various IR funds (Depreciation Reserve Fund, Pension Fund, Development Fund and Capital Fund). Earlier, this interest was adjusted to IR funds through the year-end proforma adjustment with the Finance Ministry.

From 2006-07, IR decided to first credit the interest income accruing on its fund balances to 'miscellaneous receipts' and subsequently debit an equal amount to the same funds. CAG hasn't agreed to this change either. "If the interest amount is received under miscellaneous receipts, the surplus would be enhanced artificially," says a CAG letter to IR.

Losses on strategic lines (Rs 309 crore): The Centre compensates IR for the losses it incurs on strategic lines. Previously, IR used to deduct the compensatory grant from the annual dividend payable by it to the government. However, from 2006-07, IR decided to deduct the compensatory grant from its working expenditure, saying that "the reimbursement of losses should rightly go for reducing the excess expenditure".

Simultaneously, it didn't make any deductions from the dividend payable. The Railway Convention Committee, in its latest report, has recommended that IR get CAG's views; CAG is yet to approve this change.

Accounting for the surplus

The claim

"The Railways is poised to create history by generating a cash surplus before dividend of Rs 20,000 crore in 2006-07, as against Rs 14,700 crore in the previous year."

- Railway Minister Lalu Prasad Yadav, presenting the Railway budget in February

The reality

Of the Rs 20,153.5 crore cash surplus before dividend declared by the Railways, Rs 2,690 crore (13.5%) is the result of a change in accounting procedures relating to three entries:

Lease charges payable to IRFC: Rs 1,720.12 crore

Interest on Railways fund balances: Rs 660.85 crore

Losses on strategic lines: Rs 309 crore

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