Behind Lalu's 'surplus' claim: A shift in accounting policy
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.
Re: Behind Lalu's 'surplus' claim: A shift in accounting policy
I hope that the management experts might have realised the real facts behind Laluji's surplus claim and his management expertise. It is well known that majority of the passengers and freight started using railways instead of road transport due to cost effectiveness and bad conditions of the road. Naturally the railway receipts increased enormopusly without spending an additional penny on the existing amenities and facilities. Laluji in his own rustic term had said that "BHAINS KA POORA DHOOTH NIKALNA CHAHIYE " This in management terms is "Optimum capacity utilisation"
Re: Behind Lalu's 'surplus' claim: A shift in accounting policy
An article from organiser.org dated 10 January 2010: Organiser - Content
The Railways’ White Paper
Mamata exposes Lalu's bluff
A case study on “Financial Turnaround of the Indian Railways” conducted by two scholars at Australia’s Canberra University pointed out that certain changes in accounting of lease charges for locomotives and wagons reduced operating expenses and increased the surplus. The study says: “The above changes alone amounted to 26% of the surplus in 2006.”
The Railway Minister Mamata Banerjee had no option but to shatter the media-orchestrated myth of her predecessor Lalu Prasad achieving magical turnaround of the Railways, according to analysts.
Had she not exposed Lalu’s jugglery, she herself would have landed in trouble in defending and perpetuating the inflated investible surplus of Rs 46,534 crore contrived during the last five financial years ending March 31, 2009.
The retention of this inflation amount would have invited audit objection sooner or later. It would have also weakened the Railways’ case for additional budgetary support required for massive expansion and modernisation. She ran the risk of sullying her image if she had defended and perpetuated the accountancy magic.
In any case, certain enterprising professionals had already partly reported the accountancy changes that helped Lalu presented rosy picture of the Railways’ finances.
Before discussing these reports, a recap of accountancy scam.
Without naming her predecessor and without even using harsh words such as scam, Mamata exposed Lalu’s accounts fudging in the White Paper that she presented to Parliament on December 18.
The White Paper says the Railways made two accounting changes in the 2007-08 rail budget to inflate profitability and the surplus money that can be ploughed back into the Railways for its growth.
It introduced the terms “cash surplus before dividend” and “investible surplus” to inflate profitability and the surplus money that can be ploughed back into the Railways for its growth.
After aligning the accounts in the same manner as were presented prior to the two accounting changes and adjusting for certain other deviations and inadequacies, the cumulative investible surplus for five years reduced from Rs 66,804 crore to Rs 20,269 crore, the Paper shows.
The truth that the Railways had inflated investible surplus to enhance the charisma of Lalu was already in the public domain. The Paper has actually put an official stamp on public-spirited attempts to separate fiction from facts in the Railways budget.
It is here pertinent to recall a news headlined “Behind Lalu’s surplus claim: A shift in accounting policy” published by The Indian Express on September 14, 2007. The story said: “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.”
A case study on “Financial Turnaround of the Indian Railways” conducted by two scholars at Australia’s Canberra University also pointed out that certain changes in accounting of lease charges for locomotives and wagons reduced operating expenses and increased the surplus. The study says: “The above changes alone amounted to 26 per cent of the surplus in 2006.”
The study pointed out: That “Several macro-economic factors have made significant contribution to the turnaround of the IR. It will be incorrect, therefore, to ascribe the IR success to managerial leadership alone.”
According to a news story in Business Line, dated March 13, 2009, a notable book on Railways turnaround titled From Bankruptcy to Billions itself has admitted the fact that accounting changes contributed to the magical transformation.
The story said: “Had the accounting methods that the Indian Railways follows now been followed during Mr Nitish Kumar’s stint as a Railway Minister, the Railways would have had an annual cash surplus of Rs 4,789.5 crore in 2001, Rs 6,286.58 crore in 2002, and Rs 8583.25 crore in 2003. And, please hold your breath—in 2004, the year when Mr Nitish handed over charge to Mr Lalu Prasad, the Railways would have had a cash surplus of Rs 9,552.27 crore!”
This startling information is tucked away in Appendix 6 of the book, whose one of the two authors served as officer on special duty in Lalu’s office during his ministerial tenure, it stated.
“The authors also admit that, in 2008, accounting changes helped the Railways reflect an incremental cash surplus of Rs 3,489 crore (14 per cent of Rs 25,006 crore surplus)”, the story added.
These three instances show that the White Paper has not covered all the dubious accountancy changes made by the Railways.
In any case, the Railways accounts are archaic, non-transparent and non-comparable with any standard corporate profit and loss account. They have to be accepted with a pound of salt even when certified by auditors.
The Railways’ accounts do not reflect the massive interest and tax subsidies enjoyed since the Raj days. It only flaunts the so-called losses on passenger services that keep getting inflated year after year. There is no transparent accounting of cost and revenue for each and every activity.
The accounts are an amalgam of financial norms followed by government and commercial entities.
As put by senior Railways official VA Padmanabhan in article titled “Towards Better Presentation Of Railways Accounts”, “Even to a fully conversant and well-informed personality, the accounting concepts adopted by Indian Railways are not easily understood, leave aside appreciating the intricacies involved.”
Significant differences exist in the presentation of the items in the balance sheet of Indian Railways vis-à-vis the balance sheet of a corporate enterprise.
Analysts suggest that the Railways should come out with another white paper on accounting reforms that have been in the works since 2005 under the aegis of an Asian Development Bank-funded project.
The suggested paper should give a true and fair picture of the Railways’ financial health. (NM)