Urgent Course Correction Imperative for Indian Railways

Raghu Dayal
Raghu Dayal, former Chairman & Managing Director of CONCOR and Senior Fellow, Asian Institute of Transport Development, delves into what ails the Indian Railways and suggests ways of bringing it on track.

IR’s freight and passenger business over 2014-15 to 2018-19

Railways’ freight and passenger businesses over the 5-year period, i.e., 2014-15 to 2018-19 (budgeted) indicate a flat growth. The number of total passenger journeys would record a CAGR of 0.22%, passenger kilometres 0.16%, and freight output in terms of net tonne kilometres 0.02%. Whereas, its gross revenue receipts over the period show a CAGR of 4.55%, and its working expenses a CAGR of 5.46%.

The broad financials relevant to IR revealed in India’s Union Budget for fiscal 2018-19 help assess its strategies and plans in the immediate phase. A close look at IR’s budgeted passenger and freight traffic profile indicates that IR would remain content with miniscule incremental increase in its businesses. The freight traffic budget envisages an increase of 4.8%, from 652 billion freight tonne kilometre (NTKM) in 2017-18 to 683 billion in 2018-19 and 3.8% rise in freight revenue, from ₹1,17,500 crore in 2017-18 to ₹1,21,950 crore in 2018-19. There is an increase budgeted to the extent of 1.86% in total passenger-km, from 1,135b in 2017-18 to 1,157b in 2018-19, and an increase of 3.7% in passenger revenue, from ₹50,125 crore in 2017-18 to ₹52,000 crore in 2018-19.

In fiscal 2017-18, IR’s freight lifting aggregated 1,159.57 million tonne or 5.4% lower than the budgeted volume of 1,165.00 m.t. The passenger traffic too remained almost stagnant, the year ending with a total of 8,287 million journeys vis-a-vis the budgeted 8,260 million passengers, and 8,220 million in the previous year 2016-17. A similar trend is reflected in the earnings: passenger business fetched an amount of ₹48,643 crore in 2017-18 which, in fact, is 3% lower than the budgeted amount of ₹50,125 crore.

Capital expenditure earmarked for IR

The Union budget allocated a record ₹1,48,000 crore for IR, of which ₹1,46,500 crore is capital expenditure, including gross budgetary support (GBS) of ₹53,060 crore, up from ₹40,000 crore in 2017-18. With the budgetary support steadily stagnating, extra-budgetary resources (EBR) have been the mainstay of IR’s capital expenditure. EBRs, which are largely loans mobilised through Indian Railway Finance Corporation (IRFC) and from financial institutions, besides multilateral agencies such as World Bank, Asian Development Bank, JICA, increased from 47% of capex in 2016-17 to 56% in BE 2018-19.

A large part of the capital expenditure earmarked for IR is for capacity creation – double/triple/quadruple-tracking and gauge conversion. IR targeted to commission 4,000 km of electrification during 2017-18. It plans to procure 12,000 wagons, 5,160 coaches and approximately 700 locomotives during 2018-19. IR’s most important capacity-enhancing project, the dedicated freight corridors (DFCs) needed to be furiously fast-tracked, but the budgeted allocation of ₹10,490 crore for 2017-18 has been scaled down to a revised estimate of just ₹3,000 crore, and the 2018-19 allocation made is for ₹6,277 crore. Actual expenditure on the two ongoing DFCs in 2016-17 amounted to ₹6,253 crore.

Focus on improving quality and safety

There is considerable emphasis laid on improving quality of rail passenger travel, allocation for passenger amenities having been more than doubled, from ₹2,471 crore in revised budget for 2017-18 to ₹5,158 crore for 2018-19. It is proposed to introduce modern train-sets instead of traditional individual coaches, redevelop railway stations, equipping them with Wi-Fi, CCTV cameras, installation of escalators at stations with daily footfalls of over 25,000.

A ‘Safety First’ policy with allocation of increased funds under the Rashtriya Rail Sanraksha Kosh (National Rail Safety Fund) is the cornerstone of railways’ focus on safety. The total amount, including RRSK planned on safety-related works for 2018-19 is ₹73,065 crore. The revised 2017-18 budget for this activity is ₹68,725 crore. The RRSK will comprise ₹5,000 crore from GBS, another ₹5,000 crore from railways’ revenues, and ₹10,000 crore as IR’s share from Central Road Fund (levied by government on sale of POL). Maintenance of track infrastructure is being given special attention. Over 3,600 km of track renewal was targeted during 2017-18. IR plans to step up the use of technology such as “fog safe” and train protection and warning system. Provision has also been made for eliminating 4,267 unmanned level crossings on broad gauge network in the next two years. A major programme is claimed to have been initiated to strengthen infrastructure at the goods sheds and fast track commissioning of private sidings.

Railway Projects

Crushing load of rising debt

Amidst a flurry of several schemes and plans that IR has outlined, involving huge investment outlays, there is a palpable unease in some circles who, although convinced of the need to substantially strengthen and restructure the network and its services, apprehend that the already perilous state of its finances will be compounded with the sharply rising debt burden. They cite the example of national flag carrier Air India, which, laden with heavy debt burden, had to be put on the auction block. IR’s steadily diminishing share of freight and passenger businesses will make it increasingly difficult for it to regain its place in the country’s transport market.

Freight declining business levels

There has been a steady decline in the annualised growth of IR’s freight business over the last three five-year plans - Plan X (2002-07), Plan XI (2007-12), and Plan XII (2012-17), during which annualised growth in freight uplift was 8.12%, 5,89%, and 2.68%, respectively, and likewise 7.62%, 6.78%, and (-) 1.46% in NTKM. Competition that the rail freight sector faces is formidable. A record 9,000 km length of National Highways along India’s arterial routes is being added in the fiscal ’18 itself. The 96,000 km highways length that carries 40% of country’s road traffic is being expanded to 200,000 km with capacity to carry 80% of goods traffic. Trucks will clock much higher mobility, further facilitated by the GST regime.

Need to reorient and re-dimension freight transportation strategy

Long distance rail haulage of coal will keep diminishing, compelling IR to look for life beyond coal, currently accounting for half of its total freight business. With its vision key-holed on bulk commodities, IR has, for example, less than 2% share in FMCG segment, and 1% in auto and textiles. Railways across the globe are grappling with macroeconomic changes – staple flows, for example, of coal, steel, petrochemicals, etc., cannot be relied upon. The pace of innovation apparent in other modes, e.g., in the road haulage in Europe – widespread adoption of truck platooning and the longer and heavier lorries - has been making inroads into railways’ market share. High capacity trucks carry goods door-to-door, time-definite, convenient and economical.

For weaning away high-value, non-bulk sector from roads, it needs to create critical mass of piecemeal wagons/containers, in partnership with other players, for time-tabled multimodal logistics services end-to-end. The container represents a strategic innovation for piecemeal shipments - railways catching up with container-oriented tools, e.g., advanced tracking, monitoring and e-waybill systems, thereby, necessitating automation, digitisation and inter-modality. It may well optimise double stack container train operation conducive to economies of scale. IR management has of late initiated several measures to enlist institutional customers’ cooperation for enhancing rail freight haulage. There is need to build mutual trust, implement policies and initiatives - sincerely and speedily.

Crushing weight of passenger cross-subsidisation

Railways has for long been traversing a facile, though perilous, route - often hiking freight charges and upper class, mostly AC, passenger fares. By steady cross-subsidising passenger business, the IR has out-priced itself in the freight sector, thus, tending to kill the goose that lays the golden egg. While hauling a passenger train for one km cost of ₹1,223.04 in 2016-17, it resulted in a net loss of ₹489.01. On the contrary, hauling a freight train per km cost ₹1,661.82, it brought in net earnings of ₹1,187.28.

Increased competition for passenger traffic

Now, IR’s passenger business too is under siege. There is this looming shadow of competition from budget airlines and from new style, high-capacity buses, also personal cars covering inter-city distances – fast and frequent. IR has experienced a decline in annualised growth in the number of passenger footfalls since the country’s Plan XII (2012-17) during which the number of rail travellers fell from 8,420.70 m in 2012-13 to 8,116.10 m in 2016-17, registering an annualised decline of 0.26%, although there was a 2.18% annualised growth in passenger km - from 1,098.10b in 2012-13 to 1,149.84b in 2016-17. The Economic Survey explained how railway passenger business declined by an average 0.26% every year in the five years ending 2016-17, whereas the number of domestic air passengers increased 10% annually.

In the last three years, the domestic air passenger traffic grew at 18% per annum and the airlines placed orders for more than 900 aircrafts. Domestic airlines increased their available seat kilometres (ASK) by 8% each year between FY 2012-17 to 116.94 m. Regional connectivity scheme, UDAN (Ude Desh ka Aam Nagrik) aiming to connect 56 un-served airports and 31 un-served helipads across the country, expanding airport capacity more than five times to handle a billion trips a year, is poised to surpass the total number of upper class rail travellers sooner than 2020.

Low cost airlines have been increasingly enticing passengers, most of whom, as a rule, constitute IR’s “upper class” business segment, that is, AC 2-tier Sleeper and AC III rail travellers. Narrowing fare gap between airlines and railways has been a catalyst for the switch from trains to airlines. For example, the ticket price of IndiGo (India’s largest airline by market share) dropped 1% annually during this 5-year period. On the other hand, according to Credit Suisse Research, AC rail travel fares increased over 60% during FY2011-17.

Indian Rail

Need for IR to rationalise its fare/freight structure

With low cost air carriers looming large, it must refrain from raising AC train fares. As it is, IR’s ‘upper class’ travel constitutes a miniscule segment in its total passenger business: only 1.85% of all its passenger journeys (in 2016-17), and 9.60% of total pkm, but contributes as much as 32.33% of the total passenger earnings. The second-class ordinary train journeys in both suburban and non-suburban services are the major culprits, constituting 78.6% of IR’s total passenger traffic (in 2016-17) but yielding a paltry 16.7% of the total passenger earnings. Non-suburban commuters availing of season ticket concessions for up to 150 km travel, constitute 22.8% of total non-suburban passenger traffic, but yield only 1.2% of earnings!

Patterns of passenger demand

IR operates a daily average of over 13,300 passenger trains – including about 3,500 long distance inter-city mail and express services, 4,700 short distance stopping “regional” trains, including those serving towns by ferrying commuters to/from expanding cities and metros, besides around 5,100 sub-urban ‘locals’, mostly in Mumbai and Kolkata. The “regional” services contribute the maximum loss in passenger business and consume a substantial portion of scarce movement capacity, including on high density routes. An autonomous corporate entity, say, like CONCOR, under the IR umbrella, will be well placed to deal in this segment of rail business with a clear focus, coordinate better with respective state government authorities and provide for multi-modal transport, involving road services, especially where rail services make no sense, economically and rationally. China stoutly discouraged short distance rail travel.

To expand and accelerate passenger services

It is axiomatic that IR needs to aim at high capacity speedy inter-city passenger trains for possible perceptible difference also in pre-board facilities – hassle-free booking and reservation on demand, clean station platforms, also clean coaches and toilets, standardised packaged food, and trains running on time. Some trains can run end-to-end with minimum intermediate halts. Lately, IR has talked of Tejas, Humsafar, Antyodaya, Uday, et al. as its new pantheon of passenger services. Some of them in the species such as Uday (Utkrisht Double Decker Air conditioned Yatri express) may be pursued on priority for popular and dense routes to overcome capacity crunch. As a perceptible confidence-building measure within the organisation and among people at large, IR may well take a bold initiative to run some additional through trains, assuring reserved accommodation on demand, to begin with, on one or two under-served popular routes such as Delhi-Darbhanga. It will mean good economics for IR and good politics for the government.

IR needs a quick course-correction to rediscover its potential

India’s most important enterprise, IR for long is stuck at 1% of national GDP; its potential and economy’s expectations require it to aim at 2% of GDP, a tough call in a growing economy. True, there is no magic bullet. IR has been diagnosed and scanned extensively as no other organisation has been, and cures have been prescribed. It needs to heed how some of the most successful companies faded into irrelevance because they remained complacent, failing to adapt their businesses and structures to brewing market disruptions, trends and technologies.

Autonomous corporate entity - strategic clarity and organizational focus

A rigid bureaucratic structure is antithetical to business ethos. Railways must first shed its widely (and mistakenly) perceived role of a departmental undertaking with public service obligation and, instead, perform as a corporate entity with inalienable responsibility to carry nation’s freight and passengers adequately, efficiently and economically. There are ministries and programmes to look after social obligations, for which they have their own budgets.

Cutting costs, streamlining the system

The bigger the organisation grows, the more it tends to grow. Even a relentless pursuit to improve the balance sheet top-line must not let the guard be lowered to cut costs, effect economies and eliminate flab and waste. IR invests in new technologies but persists with old staffing patterns. Several services and activities are outsourced, but permanent cadres show little shrinking. Multi-skilling remains just a slogan. Soon salaries and pensions will swallow three-fourths of its working expenses budget.

Spiralling wage bills raise alarm

Amidst its lacklustre business turnover and revenue stream, its expenditure keeps increasing. The wage bill keeps ballooning: IR’s wage bill in just ten years doubled in relation to its revenue. While its wage bill jumped at 16.11% CAGR in these ten years, its revenue increased at a CAGR of 8.48%. Instead of the number of employees being drastically pruned, especially in the context of substantial induction of newer technologies at high cost and outsourcing of myriad activities and services, IR has been splashing its “biggest recruitment exercise” to hire additional 1,10,000 employees, a large number of them in category ‘D’.

Restructure top management regime

IR’s management structure has, inter alia, been compartmentalised, leading to departmental empire-building, rendering it perilously obese and extortionist. Several debilitating anomalies and distortions have sneaked into the system – much to the detriment of its efficiency and productivity. IR has made a welcome, though yet a half-hearted beginning, towards functional integration by designating three Members of the Board – for Traction, Rolling Stock and Infrastructure. Functional requirement must perforce be an overriding consideration in determining the apex management pyramid consistent with the railways’ primary function being production, marketing and operation of transport services. Without in any way lapsing into a departmental debate, how has the government been manoeuvred to let senior most positions in divisions and zones be manned by managers from ‘non-operational’ disciplines such as Stores and Finance, who for best part of their career have no exposure to real-life railway experience, nor to its customers?

Decentralised management of large work centres

A small beginning has been made for posting junior middle level managers for senior level oversight at some major stations. All large station complexes, major freight depots and centres, maintenance workshops may be endowed with local Area Managers selected by a special body, if not Union Public Service Commission, from the general administrative pool with delegated authority over all functionaries and disciplines in their jurisdiction. In due course, these managers may well constitute the bulwark of administrative resource for the organisation, from amongst whom to choose for further exposure and training to fill higher administrative positions.

Not even a big company can any longer get from its own research laboratories all, or even most, of the technology it needs. Again, like in China, IR may facilitate and encourage induction of state-of-the-art technologies for myriad rail equipments, development and production of which be left to public/private sector enterprises. So also for construction of new rail infrastructure. IR would do well to move out of in-house production of equipment as it has done for manufacture of diesel and electric locomotives at greenfield plants to be managed by General Electric and Alstom, respectively.

A key challenge – and opportunity – for business leaders today is to create a sense of urgency in their organisations, by thinking through the consequences of high impact competitive and environmental scenarios. A fine body of men, much like those in the country’s armed forces, the spirit and symbol of an inclusive India, known for their diligence and devotion, railwaymen only need leadership to seize the future together. If duly nurtured and wisely led, IR will bounce back, like China Rail has done so splendidly.

NBM&CW August 2018

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