Why Prabhu's Rail Budget Failed The Dalal Street Test

Indian stock markets fell most since February 9 on a day when Railway Minister Suresh Prabhu presented his first Railway Budget. The BSE Sensex closed 261 points lower to end at 28,747; railway stocks fell as much as 6 per cent.

Here's why investors are unhappy with Mr Prabhu's Railway Budget: (Read: The "4,5,11" Rail Budget)

1) No hike in passenger fares: The railways incur a loss of Rs. 26,000 crore per year in subsidizing passenger fares. Unchanged prices of rail tickets raise concerns that the Railway Budget leans towards populism.

2) Freight fares, which contribute 67 per cent to railways earnings, are among the highest in the world. It's for this reason that the share of freight carried by railways is declining. Mr Prabhu seems to have disregarded the fact as he raised freight fares for several commodities by as much as 10 per cent.

3) Mr Prabhu said the railways will now save more to finance investment in infrastructure. He, therefore, set the operating ratio target at 88.5 per cent for 2015-16, meaning the railways will save 11.5 paise per rupee it earns in the coming year. Analysts are not impressed as the savings are likely to come from the hike in freight rates. (Read)

"If improvement in operating ratio is going to come from freight rate hikes and not through innovative schemes, it will not have a lot of impact," Biswanath Bhattacharya of KPMG said.

4) The plan outlay for capital expenditure has been hiked by 52 per cent to Rs. 1 lakh crore, a positive step, analysts say. But there's no clear roadmap about how the government will organise the additional funds, analysts say.

"We have to see how rest of funding is going to happen through the year," Mr Bhattacharya said.

5) Mr Prabhu said the railways will invest Rs. 8.5 lakh crore over the next five years. The additional financing will come from market borrowings and multilateral institutions, he said. To meet the five year target, investment will have to speed up as the Railway Minister has set aside just Rs. 1 lakh crore for investment next year, analysts pointed.

Mr Prabhu's Budget also came for some praise; no new trains were announced, perhaps for the first time. Analysts like Abhaya Agarwal of EY termed Mr Prabhu's Budget as a "rockstar" Budget. "Whatever you wanted to hear in terms of productivity, investments...it is there." he said.

Manish Sharma of PwC said Mr Prabhu has put a high emphasis on kick starting the capex cycle. "I am surprised the way markets are reacting," he said.

Market experts like Sanjeev Bhasin attributed Thursday's selloff to derivatives expiry. "Heavyweights like Reliance Industries and ICICI Bank are down. Markets went into the Rail Budget with not many expectations. Real action will be on the Budget day.