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Are the Railways Reforming?

The emphasis on better utilisation of existing capacity in the Indian railways has obviously come to stay, though the railway budget of 2006-07 also outlines investment possibilities that are to be tapped. What will be crucial is the ability of the railways to increase their share of freight traffic over a period of time, even as areas in the passenger segment require review and consolidation. The budget gives the impression that the organisation might soon emerge from the chaotic situation in which it has been for a long time.

Are the Railways Reforming?

The emphasis on better utilisation of existing capacity in the Indian railways has obviously come to stay, though the railway budget of 2006-07 also outlines investment possibilities that are to be tapped. What will be crucial is the ability of the railways to increase their share of freight traffic over a period of time, even as areas in the passenger segment require review and consolidation. The budget gives the impression that the organisation might soon emerge from the chaotic situation in which it has been for a long time.


n the course of summing up a debate on ‘Why Do We Need the Railways?’ a decade back at the European conference of ministers of transport, it was strongly emphasised that nothing is possible without a plan of action that sets clear objectives and clearly specifies the associated financing mechanisms. This is, of course, provided that commitments to pursue such objectives are respected and an end is put thereby to stop-start policies. Essentially, at a more basic level, the

question was whether or not we wish to maintain a significant level of activity in the rail sector and thus acknowledge the social benefits and economic benefits of the railways or if we simply wish to see them confined to playing a minor role. Analysts of the Indian railways have been asking precisely the same set of questions for nearly a decade. Time and again it has been pointed out that the railways in India have been positioned for quite some time at a junction from which only one path might have the potential to move the organisation towards success.

Economic and Political Weekly April 8, 2006 Having taken other paths, the railways have only managed to maintain a status quo. This year’s rail budget (2006-07) promises many steps towards the reform route (in terms of the road map provided by the Rakesh Mohan Committee which is not being acknowledged) though there are many plans, which could derail the process.

Riding on a surplus wave, the minister attempts to sustain it. The increased efficiency on the system in terms of the various dimensions has provided the benefits. Studies, including those of the author in the past two decades, have shown that this would indeed occur because of better capacity utilisation. The railways have realised this potential finally – maybe a bit too late. The diversion of freight traffic to the roads that has taken place slowly, but steadily over a period of time, has resulted in its present share of nearly 70 per cent in freight movement. Apart from the inherent advantages of road transport in terms of flexibility, it was always common knowledge that significant road movements, especially bulk movement of coal, ores, and many other such items, were forced upon truckers because of the inefficiency of the railways. Higher costs resulted, thereby imposing a huge burden on the economy. This issue of being able to take care of the bulk movements first is still being glossed over. At present, only 67 per cent of the coal movement, 65 per cent of ore movement, 40 per cent of cement movement, 74 per cent of fertiliser movement, and 25 per cent of petroleum product movement take place by rail. A higher level of efficiency could result in much larger movements without any tariff increases. This was attempted in the past two years, as a result of which the originating tonnage has increased significantly. Further, the plan to load more on a wagon is a useful step. Equally important are the proposed discounts on freight movements during peak and non-peak seasons, and discounts on incremental freight in the empty flow direction. These proposals have been in the air for quite some time but have not been put into place earlier due to the continued emphasis on a centralised framework of decision-making.

Limits to Capacity Utilisation

There are limitations, of course, to the potential that be tapped from better utilisation of capacity. Unless significant investments are made, more benefits cannot accrue. To do this, the budget provides some outline of investment possibilities that are to be tapped. Once such initiative relates to public-private participation in a number of areas. For example, the move to get private sector containers on railway tracks is a good commercial strategy. To begin with, the proposal is to enable rail movement of private container traffic, which was not allowed till now. Later, the private sector will be persuaded to get its own vehicles, with the railways providing the tracks and motive power. The success of this venture would naturally depend on a much higher level of efficiency of operations. Ultimately, some private sector participation is expected in the provision of the freight corridors that are being planned between various metros. This is an ambitious project, the details of which are still being kept under wraps. As of now, the total investment on phase I of the new freight corridors is expected to be Rs 22,000 crore with a special purpose vehicle expected to leverage equity of Rs 7,500 crore and raise a debt of Rs 15,000 crore for financing the project. Though this will involve the continued dependence on internal financing and budgetary support, it is expected that some oil majors would roped in to invest in the equity of the proposed project. This may yield returns over a period of time. Some of the investments on network expansion, double tracking, etc, are expected to yield returns earlier. But what is crucial is the ability of the railways to increase their share of freight traffic over a period of time by sustaining a high level of efficiency of operations, which would be important for realising a certain rate of return on investments. Considering the fact that the railways were able to achieve a new record of loading 668 million tonnes of freight with a historic growth of 11 per cent by reducing wagon turnaround time and achieving additional loading of 4 to 8 tonnes per wagon, this is perhaps the right direction in which they are moving. By sustaining this growth, the economy would reap the economic and social benefits associated with such huge investments.

However, the fairly elaborate plan to increase the number of passenger trains on different routes could pose immediate problems. This involves the introduction of 55 new trains and conversion of 200 mail/express trains to super fast ones. Without additional track capacity, freight movement would be hit and therefore revenue too. However, this effect is sought to be minimised by increasing the number of coaches to 24 in many popular passenger trains. This exercise would, no doubt, have to wait till the project to increase platform lengths of the concerned sections is completed. Without doubt, these are attempts to face the intense competition that has already emerged from road transport, even in the long-distance segments consequent to the developments on the national highway front. But the railways need to understand that there are areas, especially in the passenger segment, which require review and consolidation. The proposal to reduce air conditioned passenger fares is not likely to have an impact on revenue since the long-distance segment of passenger traffic is usually unresponsive to fare changes. Some changes in the fares for the second-class segments, especially express and mail trains, could prove to be useful from a revenue generation point of view. The observation that such changes can drive people to the air does not seem to be valid since there is very little capacity that is as yet available on airlines, and this too is very restrictive in terms of routes. The rationalisation of goods tariff is a continuing process as a result of which tariffs for some categories could go up, while for the others it could come down. Over the next three years, except rates of some light commodities, the rates for the highest classification would be less than double that of the lowest classification. The impact however is expected to be marginal and not of consequence to the user.

Technological Upgradation

Technological upgradation is a prime necessity. The budget provides for this by attempting to do a number of things. One method is to increase goods train capacity, which is expected to be doubled in five years. The plan is to introduce lighter wagons that will be moved at much higher speeds. This has been a major problem for decades. At present, it is conceded by the railways that the average speed of goods trains was just about 23 km per hour on the broad gauge and 17 km on the metre gauge. While upgradation by way of induction of concrete sleepers, heavier rails, minimising of rail joints would enable enhanced axle loads, higher speeds would be possible on the new freight corridors. Equally important is the requirement in terms of a quantum increase in terminal capacities. This is necessary in order to reduce loading and unloading times. The

Economic and Political Weekly April 8, 2006

emerging competition from road transport, especially in the freight segment, cannot be met effectively in any other way.

Higher Plan Outlay

The higher plan outlay of Rs 23,475 crore reflects the immediate investment plans of the railways and is higher by 32 per cent from the plan size for the current year. The general exchequer is expected to provide Rs 7,511 crore, which include Rs 1,365 crore for the special railway safety funds, and Rs 711 crore from the central road fund, leaving a net budgetary support of Rs 5,435 crore for distribution to different plan heads. It is to be clearly noted that internal resource generation is expected to be much higher at Rs 10,794 crore compared to a little less than Rs 6,000 crore in 2005-06. The total amount to be mobilised through extra budgetary resources is Rs 5,170 crore of which Rs 4,170 crore will be raised through market borrowings by the Indian Railway Finance Corporation for procurement of rolling stock, with the remaining expected to be raised by Rail Vikas Nigam Limited for use in investments on various railway projects. The total borrowings are higher by nearly Rs 2,000 crore compared to 2005-06. It is observed that the provision for the safety fund set at Rs 2,100 crore appears to be a substantial decline from the provision of Rs 3,645 crore during 2005-06. This is not a positive sign since the backlog in terms of arrears of track renewals and bridge rehabilitation, which has been a persistent feature of the Indian railways for quite some time, could only get larger and create more operational problems.

Given the performance in 2005-06, the targets set for freight movement, namely 726 million tonnes, may not be ambitious. With the railways attempting to reorient themselves with a focus on core activities, the situation at present is that they are about to be reorganised, and the public authority responsible for the rail sector is playing a fairly proactive role in the process. The origin of the current situation of the railways lies far in the past and calls for all those responsible for rail transport policy to examine the innovations that the organisation can, and must at all costs, propose if it is to remain a major player in the transport sector. However, it is for this very reason that the railways should not be treated as a single and coherent entity. In practice, the railways offer a variety of services which are not all equally well matched or in some cases, not matched at all to the requirement of the users. It is precisely this multiplicity of services, that holds the key to revitalising the role and standing of the railways, which would thus be able to compete effectively, adapt to market conditions and ultimately move towards meeting the goal of economic and social profitability. Overall, the railway budget 2006-07 gives the impression that the organisation can soon be expected to come out of the chaotic situation in which it has remained for quite some time.



Economic and Political Weekly April 8, 2006

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