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What will the Indian Railways Budget 2012 unveil? March 12, 2012

Posted by Ramnath Rangaswamy in India, Indian Economy, Logistics, Railways, Supply Chain.
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This is the Budget season. The Railway Budget will be presented on 14th March. As expected, the newspapers have published numerous articles about what ails Indian Railways and what needs to be done. Sam Pitroda’s report on how to modernize the Indian Railways, Dr. Anil Kakodkar’s report on safety, Indian Railways vision 2020 and of course numerous other editorials and in the newspapers.

The reason there is so much activity and buzz around the Railway Budget this year is because (i) Indian Railways financials are in a major mess and (ii) the Indian Railways is an important pillar of the Indian economy / GDP growth.

As per World Bank studies, rail transportation has an elasticity of 1.25 with GDP growth. Hence for an economy which would grow ~9%, rail traffic capacity should grow by 11%. Indian Railways growth is slightly more than half of that required to support the country’s growth. The Indian Railways will become (if it has not already) an impediment to the GDP growth of India. Ask anyone importing bulk commodities at our Ports on how much time, effort, follow-up it takes to evacuate the bulk commodities from the Port to the hinterland. Ask the power companies and the coal companies the issues they face with Indian Railways in coal transportation.

The Indian Railways is now seeking a bail out by asking the government for to pump in about Rs 100,000 Crores ( Rs 1000 billion = Euro 15 billion).

What are the root causes for this mess?

The immediate reason for this financial mess is that (i) Passenger fares have not increased for 8 years and (ii) Vl Pay Commission has increased cost of manpower without any concomitant increase in productivity or earnings.

Passenger traffic is subsidized at the cost of freight traffic. For cheap political popularity, the Railway Ministers have not been increased passenger fares for 8 years. Just for perspective, crude oil prices in 2004, when the last fare increase was done was US$ 35. Today it is now US$ 90. Petrol price in India in 2004 was Rs 35/litre and today it is Rs 60/litre. With economic liberalization, consumers nowadays have become market savvy and understand that prices will increase. An increase in line with input cost increase is logical and accepted by consumers.

The other fundamental and scary reason for the mess of the Indian Railways is that the Indian Railways does not seem to understand their own importance and role in the economic health and growth of the country. Don’t get me wrong; the officers and team of the Indian Railways are smart and bright. The problem is the organization structure, processes and leadership.

The Indian Railways is superbly efficient in operating and running trains. The whole organization from the Railway Board (Ministry of Railways) to the lowest rung in the railways is focussed on safe and punctual running of trains. That is great! But who does the strategic thinking, forward planning if everyone in the organization is going to focus on “daily operational issues”?

Because of this lack in strategic thinking, the Indian Railways has not been able to keep pace with the changing requirements of the liberalized and high growth rates of the Indian economy. The liberalized economy has thrown open many new opportunities for the Indian Railways, but it has been unable to capitalize on them.

Indian Railways share of the freight traffic has dropped from 80% in 1950-51 to 30% in 2000-2001. In any other private company a share drop of such magnitude would prod the organization into action – restructuring, new strategies, renewed focus. But the Indian Railways being a government organization plodded and muddled on “business as usual”.

As mentioned earlier, the committees have made myriad suggestions and inputs on what needs to be done for the Indian Railways to get back on track. These are laundry lists which list everything from unmanned railway crossings to zero discharge toilets. So one has to separate the chaff from the grain.

What is the immediate problem or issue the Indian Railways should focus on?

In my view the problem statement for the Indian Railways would be;

“How does the Indian Railways increase freight capacity at 10% per annum in a financially prudent and sustainable manner?”

The Golden Quadrilateral – 7 HDN (High Density Network) routes of the Indian Railways with 20% track length – carry 70% of the freight traffic. These lines are utilized at >=100% capacity. The Railway Board (Ministry of Railways) did a detailed and meticulous planning to increase the capacity on these 7 lines so as to accommodate a 10% per annum freight increase during the Xl 5-year plan (2006-2007 to 2011-2012). The cost of the capacity increasing works was ~ Rs 14,000 Cr (Euro 2 billion). The final increase in traffic during the Xl 5-year plan would be ~6% per annum.

But to meet the long term freight requirements of India, the Indian Railway will have to look at Dedicated Freight Corridors for all the 7 HDN lines. Work has already started on the Eastern and Western dedicated Freight Corridors. Work will have to soon start on the other 5 Dedicated Freight Corridors (HDNs) if the Indian Railways wishes to continue to support the growth of India.

Similarly, Port Connectivity and Coal Mine connectivity will have to be increased.

Alongside this, wagon design will have to be modified for better payload/tare ratio and track strengthened to 60kg/metre tracks.

Great plan!

But where does all the money required for this come from?

Some of the  projects – Port Connectivity and Coal Mine Connectivity – can be under PPP. These are straightforward and hence would be plausible under a PPP framework.

For the Dedicated Freight Corridors , a soft loan maybe the solution.

But some “tough” decisions will also have to be made, if the Indian Railways have to be viable.

Increase Passenger Rates ahead of CPI so that in the next 5 years the subsidy on 2nd class ordinary/unreserved comes in a band of 10%. There should be no subsidy on any other class.

Non-core activities should be hived off. The Indian Railways has a very good model and examples of having separate legal entities under its ambit – RITES  , IRCON , CONCOR , IRCTC . Non-core activities would mean coach manufacturing, loco manufacturing, catering, mineral water production….

The organization will have to be redesigned so that focus is on freight, passenger, infrastructure, rolling stock and support structures.

Let us see what the Railway Budget brings on March 14th.

To end, I append a quote from The Thirukural

To do that which ought not to be done will bring ruin,

And not to do that which ought to be done will also bring ruin.

Verse 466 Thirukural

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Comments»

1. Anupam Sharma - March 13, 2012

Many things written about will take ages in the present set up. What about privatisation of the Railways? Almost every other country has done that. We do not even have a road map nor is there any talk.

Ramnath Rangaswamy - March 14, 2012

Dear Anupam,

I believe that parts of the Indian Railways should be privatized. Non-core activities for which there are sufficient vendors and hence there is a healthy competition should be privatized. Mineral water production (Railneer), coach cleaning, catering are low hanging fruits. Production Units (PUs) should be hived off similar to RITES, IRCON, CONCOR – they will not only survive but do well. In my opinion, the road map for privatization would look like this;
Step 1 – Outsource non-core and simple activities
Step 2 – Convert the PUs to a Corporation
Step 3 – Some dedicated lines – Coal Mines and Ports to IR interchange – can be constructed by Coal Mine owners or Port owners
Step 4 – High Speed Railway lines for passengers can be constructed and operated by private companies (Build-Own-Operate)

The other major change required is to revamp the organization structure of the Indian Railways.
1. The organization should have functions with clear role and responsibilities – Operations , Rolling Stock , Infrastructure, Marketing, Finance etc.
2. Railway Board should focus on strategy with a 5 years to 20 years horizon. Everybody in the Indian Railways from Assistant Manager to Member seem to be looking at the same “position”. Cut down the roles and positions in the Railway Board to only strategic roles.
3. Tenure of Members and CRB to be increased to 5 years so that they can implement and be held accountable for their actions (E. Sreedharan of DMRC is a great example)
4. Indian Railways should be outward looking. NHAI, AAI, Ports have done a great job by tapping the private sector for PPP and funds. Give me one good example of the Indian Railways having done this. AAI and Ports have constructed magnificent airports and ports; the Indian Railways has not been able to construct even one modern freight terminal or railway station!

Thanks for your comments.

Regards,

Ramnath

2. Rahul Sharma - March 14, 2012

We don’t mind in paying increased fare, provided the Railways properly cleans the coaches before departure. Rats and cockroaches travels along with the passengers in AC coaches making nightmare for the passengers. Having paid more money with an expectation for luxury travel, passengers could not even properly sleep due to the above menace caused by rats and cockroaches. Strangers are entering the AC coaches with the connivance of the coach attenders with an intention to loot the baggage of the innocent passengers. Unless proper flying squad is pressed into service , the image of Indian Railways would lower further forcing passengers to opt for alternative mode of transport.


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