What will the Indian Railways Budget 2012 unveil? March 12, 2012Posted by Ramnath Rangaswamy in India, Indian Economy, Logistics, Railways, Supply Chain.
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.
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
Modern Retail versus Traditional Retail – what are the differences in the logistics? January 18, 2012Posted by Ramnath Rangaswamy in Business, Consumer Goods, Emerging Markets, India, Indian Economy, Logistics, Retailing, Supply Chain.
Recently there has been a lot of news about the Retail industry in India. The news mainly revolved around whether FDI (Foreign Direct Investment) should be allowed. Last week there was news on Retailing, but of a different genre. The news was about companies which had assumed that Modern Retailing/Organized Retail will happen in India and had already started operations to use this opportunity.
Future Supply Chain Solutions has setup operations to provide Logistics Services to FMCG brands to service the Modern Retailers.
Why do Organized Retail or Modern Retail require a different distribution network as compared to the Traditional Retail? Why cannot the same distributor who services the regular stores (mom and pop stores) service the Modern Retail or Organized Retail?
To understand this, let us look at the differences in the logistics of a Traditional Retail channel and Modern Retail or Organized Trade channel
Traditional Retail: The sales person goes to the outlet, counts the inventory, explains the promotions (if any) and then suggests an order to the store owner. The store owner then agrees or modifies the order.
Modern Retail: The order would be suggested by the IT system of the Modern Retail chain. This order either would flow to the manufacturer/ LSP (Logistics Service Provider) via EDI or email or fax.
Traditional Retail: The distributor would deliver the order 1-2 days after the order was taken. Or if the model of operation is a ready stock unit [ the salesperson who takes orders travels with a van which carries the stocks] , then the stocks are delivered as soon as the order is taken – the salespersonhands over the order to be delivered to the merchandiser/ delivery boy who travels with the van. They pick the stocks from the van and deliver to the store.
Modern Retail: The delivery slots or delivery windows are fixed by manufacturer. The deliveries to the DC (Distribution Centre) or Stores have to be made within the delivery slots or delivery windows. Any miss on the delivery windows or delivery slots would lead to a penalty or/and going back to the last in the queue (your delivery will be scheduled after all deliveries for the day have been completed) or/and delivering directly to the stores.
Some Modern Retailers may require deliveries in pallets (CHEP or LOSCAM ). If the Modern Retail / Organized Channel does cross-docking, then packing would have to be done storewise [ 1 pallet per store].
In many cases since deliveries to stores has to be done in van/ trucks the deliveries may have to be done at night when there is no NO-ENTRY restriction on heavy vehicles.
In some cases deliveries are scheduled as per the category – food on a particular day, personal care (soaps, shampoos, toothpaste) on another day, staples on another day etc. If a company operates across categories, the company would have to do multiple deliveries in a week.
Traditional Retail: Standard company promotions are executed.
Modern Retail: Promotions would be partially led by the Modern Retailers. These promotions would be unique to the Modern Retailer. Any stickering or customization or manipulation that needs to be done will have to be done by the manufacturer or LSP.
Traditional Retail: A manufacturer would have a sales launch for Traditional Retailers to introduce a new product to the market. On the day the product is to be launched, the salesperson would take orders for the new product and the new product would be on the shelves.
Modern Retail: The launch of a new product in Modern Retail is more complicated. The new product launch would have to be informed to the Modern Retail months in advance. It would have to be included in the product master of the Modern Retail. The planogram would have to be modified to include the new product. In some cases, a placement fees would also have to be paid.
Traditional Retail: Once the stocks are delivered, the store owner or shop assistant arranges the stocks on the shelf or in the back room. When a customer asks for a product, the shop assistant knows where the stock is kept, gives the product to the customer.
Modern Retail: The stocks maybe taken straight to the shelf or taken to the backroom. One of the most important differences between a Traditional Store and Modern Retail store is that in a Modern Retail store the customer picks up the product from the shelf. If the product is not on the shelf, the customer assumes that it is out-of-stock. The product may actually be available in the backroom. So, one of the important logistics activity in a Modern Retail store is to replenish the shelves regularly so that the shelf is always stocked. Many stores maintain merchandisers whose job is to replenish the shelves from the backroom.
Traditional Retail: Payment is made to the stockist or distributor immediately or on the next visit of the salesperson. So, the credit period is usually equal to the time between 2 visits of the salesperson.
Modern Retail: Modern Retailers usually demand a long credit period from manufacturers and vendors. Sometimes, a Modern Retailer may ask for a special format for their invoices. They would not accept the standard invoice format of the manufacturer.
Metrics/ Scorecard Measures
Traditional Retail: Usually, Traditional channel stores do not have a formal scorecard to measure manufacturers. They have a general approach which would be regularity of coverage, time between order and delivery, and fill rates.
Modern Channel: Modern retail chains have a formal scorecard to measure manufacturers. The logistics measures would be shelf availability, inventory levels, case fill rates, on-time delivery.
Because the logistics process of Traditional Retail channel is different from the Modern Retail/ Organized Retail channel, manufacturers have a different team for the two channels. This is what the big players do. The smaller players outsource the logistics of the Modern Retail/ Organized Retail to LSPs.
Will National High Speed Rail Authority (NHSRA) give India its equivalent of TGV, Thallys, ICE, Shinkansen? January 5, 2012Posted by Ramnath Rangaswamy in India, Indian Economy, Logistics, Railways, Supply Chain.
There has been a lot of talk of recently of high speed rail networks being developed for passengers traffic. A National High Speed Railway Authority (NHSRA) is being setup by the government to study and setup the railway lines.
India has the world’s 4th largest network of railways. India has the largest growth in air travel. And this is set to grow, given that the economy is growing at ~7%. High speed trains make sense for travel distances upto about 600kms which can be done in about 2.5-3hrs in a high speed train. For these distances, many of the customers who would otherwise have gone by air would convert to the high speed train, because the door-to-door time in trains would be less than by air ( as the airport would be situated outside the city and check-in would have to be done 60 minutes prior to take-off). Some of the passengers who today travel by overnight train on these sectors would also convert to the high speed trains.
High speed trains are already operational in Europe – TGV, Thallys , ICE– Japan – Shinkansen – China. In fact countries like Turkey and Morocco have introduced high speed trains. So, it seems logical that India should not be left behind.
All this looks good and ambitious. But how can we make this a reality? And is it feasible?
What are the challaenges?
Land issues: Land acquisition in India is a major bottleneck to any infrastructure project. The Dedicated Freight Corridor also faced issues in land acquisition and hence the project has been delayed.
Indian Railways: The Indian Railways record in creating new railway lines is poor. The Delhi Metro and Konkan Railway projects would never have been executed had it been entrusted to the Indian Railways. And it is for no fault of the Indian Railways; they are meant to run and operate trains that keep this great country moving. And they do a very good job of it. The Indian Railways organization and structure is not geared to infrastructure development.
PPP: The PPP model would be the key factor in the success of this project. There are several good PPP models – Ports, Highways, Airports. These models should be used to create a framework which allows these projects to fructify.
The high speed railway projects are very capital intensive. Any PPP partner will venture into it, only if he is absolutely certain that the government will play the game according to the rules and that the government will not change the rules of the game midway through the concession period.
I was doing some calculations on the costing and pricing of the seats on the high speed trains. It is not cheap.
Infrastructure Capital Cost : Cost of laying a high speed railway line is Rs 100 Cr per kilometre. This includes tracks, overhead traction, signalling and even stations.
Train-set Cost: Cost of a train set is roughly Rs 200 Cr (€ 30 million) for a 600 seat train car.
Rolling Stock maintenance cost would be about Rs 10 Cr per train set per year.
Track maintenance cost would be about Rs 25 lacs per track kilometre.
Electricity costs for traction would be Rs 200 per kilometre [ I have not assumed any regeneration and return to grid due to regenerative braking]
The table below shows the rough calculation of the cost per passenger for two sectors that I took as a sample – Mumbai-Ahmedabad and Chennai-Bangalore. The passenger data is approximate based on the number of flights and Shatabdi trains that run between these cities.
The cost per passenger on the high speed train is higher than flight costs. [ the cost of a one-way Mumbai-Ahmedabad air ticket on a weekday was about Rs 3700 and for Chennai-Bangalore it was about Rs 3500].
How do these costs compare to high speed trains elsewhere in the world. Here is a table on the cost of travel on high speed trains across the world.
The costs that I have calculated seem on the higher side. Some of the costs are approximate costs and that could account for the higher price. Also, the cost is very sensitive to occupancy rate. Any increase in occupancy rate can bring the costs down. I guess that is where the business wizkids will apply their minds and find the optimum price.
The advantages of a high passenger train service are;
Green option: Rail is a much greener option than road or air. Travelling by train versus travelling by air reduces carbon emission by between 85% and 90%!
Instead of spending time and money in bailing out airlines, the Indian government should consider giving that subsidy to a greener and more environmentally friendly option – high speed railways. http://www.thehindu.com/opinion/editorial/article2624710.ece
Let’s hope the National High Speed Railway Authority (NHSRA) does a good job and India get’s its TGV , Thallys, Shinkansen, ICE!
Indian Railways in North East India December 3, 2011Posted by Ramnath Rangaswamy in India, Indian Economy, Railways, Supply Chain.
I read this article about India and China being linked by railways and felt happy. As someone who is passionate about the railways, [ travelling from India to London by rail, travelling on the Trans-Siberian railway and travelling from Beijing to Ulan Bator by train are on my bucket list], I was excited. Great, brilliant, outstanding!!!
But reality sunk in. Rail link with China?!!
We have not even connected all our state capitals with railways. Of the seven sisters in the North-East only 2 state capitals are connected by rail – Guwahati and Agartala. Agartala got connected only 3 ½ years ago. The Indian government does have plans to connect all 7 capitals in the next 5 years.
We have not connected our neighbours, Bhutan and Nepal, which would have been far easier a task than connecting China. Of course we have plans and are trying.
As Indian, our focus on infrastructure is prominent by it’s absence. We have just about managed to connect the Kashmir Valley with a railway xxxx years after making the plans.
I know that there is a lot of propaganda that the railways build national integration. I am not so sure about it. What the railways surely does is make it easier and cheaper for people and goods to move around. And by doing that it increases volume of goods being exchanged and the number of people who move around. If moving people and goods around is national integration, then surely the railways does contribute to national integration.
So, what are the plans of the Indian Railways to link the remote and unconnected parts of our great country.
Agartala, the capital just got connected with Kumarghat and the Indian Railway network in June 2008. Trains now regularly ply from Agartala to Lumding and Silchar. This line from Agartala would be extended south to Udaipur, Belonia and Sabroom. This line will finally connect with Chittagong Port from where goods can be supplied to North-East India. There is a plan to connect Agartala to Akhura in Bangladesh and create interchange points at Belonia (Belonia), Agartala (Akhura) and Sabroom (Ramgarh).
Imphal, Manipur’s capital is not rail connected. The closest railway station is Jiribam. There is a plan to connect Jiribam to Tupul and then to Imphal. This line would then be extended to Moreh and link up with the Myanmar Railway and connect to Mandalay. China too is interested in the link between Myanmar and India as it will connect China (Kunming) to India.
There is another link being constructed between Diphu and Karong in the north of Manipur.
Having a rail link will prevent the kind of hardships that the people of Imphal (and Manipur) have to undergo whenever the road is blocked by extremists.
This state has no railways. There is a plan to connect Bhairabi to Sairang, which would be about 35 kms away from Aizwal. Bhairabi is in Assam on the branch line from Katakhal junction.
Nagaland has a railway line with Dimapur being a major station. There is a plan to link Dimapur to Zabza and then to Kohima.
Arunachal Pradesh: There are two lines being planned; one from Murkongsleek to Pasighat and the other from Harmuti to Itanagar, the capital.
There exists a plan to link Shillong by rail via Umroi, Nongpoh, Lailad,Byrnihat to Tetelia or Kamakhya. There exists another plan to build a “circular railway” around Meghalaya starting at Goalpara, going all around Meghalaya and ending at Badarpur. There also exists shorter sections from Dudhnoi to Depa and Dudhnoi to Mendipathar.
Not exactly part of the seven sisters, but a very important, strategic and beautiful part of this great country, there is a plan to link Sevoke Road to Rangpo, the site of a famous distillery. Rangpo is not the capital, but it would provide a rail link to the people of Sikkim.
For more details please click on this link http://wiki.iricen.gov.in/doku/lib/exe/fetch.php?media=11301:vps.pdf
For an excellent photo essay on the railways of north-east India, please click on the link;