The Railway Budget for FY2002 - 03 has been tabled on 26th February. In a marked departure from the two earlier budgets, this year an attempt has been made to rationalize the freight structure for different groups of users. For one it has proposed an increase in the fare of second-class passenger traffic while holding the freight line unchanged for majority of the goods traffic. This marks the beginning of a much-needed move towards realistic user charges for the biggest public utility of India and a serious attempt at reducing cross subsidization in the fare structure.

1. Impact on the Cost and Revenue of the Steel Producers

For the iron and steel industry, however, the budget does not come as an unmixed blessing. On one hand, the freight charges have been reduced for transportation of steel and pig iron. On the other, there has been an increase in the freight rates charged for the movement of bulk raw materials such as iron ore and coal. The changes in the freight structure for an average lead distance of 700 kms have been presented in the table below:

The Economic Research Unit has worked out the increased cost implications on account of higher freight charges for the raw materials, mainly iron ore and coal for the Main Producers, i.e., SAIL and TISCO. The specific consumption co-efficients of these inputs per tonne of liquid steel are based on the averages worked out for SAIL (Bokaro) and TISCO by the World Steel Dynamics (WSD). For coal, the impact works out to be an additional burden of Rs 3.10/tonne of liquid steel for SAIL. For TISCO, the impact is estimated at Rs 2.60/tonne of liquid steel. The impact on account of increased freight of iron ore is estimated as Rs 1.10/tonne of liquid steel for SAIL and Rs. 0.70/tonne of liquid steel for TISCO. This is based on the assumption that the entire requirement of iron ore and coal is transported by Rail. The combined effect of the increased freightage of coal and iron ore has been estimated as Rs 4.20/tonne (for SAIL) and Rs 3.30/tonne (For TISCO). It should be re-iterated that these are indicative figures based on the preliminary information received and on strong assumptions of modes of transportation used by the plants.

Cost savings from lower freightage on outward traffic of pig iron and steel are Rs 16.20 /tonne. In order to have an idea of the savings and additional costs on a comparable basis, the ERU has worked out the savings in terms of liquid steel equivalent of saleable steel. In that case, the savings will be Rs 13.15/tonne for SAIL and Rs 13.63/tonne for TISCO for every tonne of liquid steel equivalent of saleable steel. In view of the fact that the actual saving/dissaving in costs on account of revised railway freight will depend upon the modes of transportation of the saleable products (i.e. by road, rail etc.), the ERU has worked out the breakeven tonnages of outward transportation of steel by Rail, which will neutralize the additional costs incurred on account of inward traffic of raw materials. It has been estimated that to offset the increase in costs due to higher inward freightage, SAIL has to transport approximately 2.85 million tonnes of saleable steel by rail. The comparable tonnage for TISCO is 0.75 million tonnes. Here again, the assumption is that the plants are able to realize full cost prices in the destination markets. If the prevailing landed prices do not cover the total cost on delivery, then the savings can be construed as tantamount to a reduction in losses of the plants.

It should be noted that the above calculations do not take into account the savings due to reduction in freightage of Pig Iron and Scrap and High Speed Diesel - an important fuel for steel making. The secondary steel producers using Scrap/PI/DRI/SI as feed material will be doubly benefited for inward as well as outward traffic if transportation is by rail.

2. Proposed Capital Expenditure Programme as a Source of Possible Demand for Iron and Steel

The proposed expenditure programme in the Railway Budget has a number of components which promise to give a boost to iron and steel demand. The major heads likely to impact steel demand are as follows:

• A Special Railway Safety Fund of Rs 17000 crore has been created for clearing the backlog of replacement of over-aged assets over the next six years. The proposed safety related work would include the renewal of nearly 17000 km of track, rebuilding of over 3000 bridges, replacement of signaling gears at 950 stations, replacement of rolling stocks and investment in safety enhancement aids.
• It is proposed to build new coaches with improved safety standards commencing from 2002-03.
• To provide value-addition to in all rail transport services to the customers and to reduce their overall logistics cost, setting up of warehousing facilities near rail terminal by state owned corporations and private parties would be encouraged.
• Introduction of high-speed refrigerated parcel vans to move perishables has been proposed.
• Funds have been allotted for new lines, doubling, gauge conversion, electrification for projects in different states based on a clear and transparent formula. Of the budgetary support available for capital expenditure, approximately 70% is kept for projects. From this 70%, allocation is first made for works in North East states at 10% of the total, funds for MTP projects, mega bridges and to projects in the newly formed state of Jharkhand.
• In 2002-03, railways propose to complete 214 kms of new lines. During the current year about 150km of doubling will be completed, while in the next financial year, a target of 250 kms has been proposed.
• The target of electrification of 2300 route kms set during the Ninth had been met are likely to be surpassed in the remaining weeks of the FY.

All of these expenditure programmes have great potential for boosting demand for iron and steel in the country. The major beneficiaries are likely to be the integrated steel plants specializing in production of railway materials. The bottomline, however, is that the domestic suppliers have to be cost-efficient and technologically capable of meeting the exacting specifications of many of the proposed projects.