Indian Railways: Can The Elephant Dance?

Indian Railways: Can The Elephant Dance?

Indian Railways is at a crossroads. Aided by the government’s renewed thrust on Indian Railways’s transformation, it can become a strong, profitable, reliable and publicly trusted organization. In the process, it can play a big role in serving India’s fast-growing transportation needs. Unfortunately, if coherent measures towards efficiency upgradation are not formulated and executed on an urgent basis, then it risks becoming a burden on the economy.

Indian Railways has been fighting intense competition, and losing. The organization that carried 89% of India’s freight traffic in financial year (FY) 1951 was left with only a 32% share in FY12. Its passenger kilometers was flattish in FY15-FY17 highlighting that Indian Railways is coming off second-best versus the airline industry, that has been growing in late-teen percentages in the last four years, as well as against the fast-improving road network.

In the last 10 years, Indian Railways has witnessed perceptible deterioration in operational and financial metrics. This has been caused largely by a combination of distorted top line growth, a huge jump in wage costs, and years of underinvestment. Profit margin and return on equity are targeted at a paltry 3% and 2%, respectively, in FY18, bringing Indian Railways’s vastly reduced fund-generation capability into focus. Revised budget for net receipts (effectively, profit) in FY18 at Rs6,425 crore reflects a decline of 50% from FY13.

Indian Railways’s gross receipts (revenue) in the last 20 years have been artificially aided by an aggressive escalation in freight rates even though service standards remain patchy. Its upper-class passenger fares too have witnessed regular inflation while airlines have dropped their fares substantially in the last three-four years. For example, air-conditioned, 3-tier fares have risen at a compound annual growth rate (CAGR) of 5% in the last five years—to about Rs2,500 for a Mumbai-Delhi trip, which is not too different from the airfare. On the other hand, lower-class passenger fares have been static. This system of cross-subsidization has been a key reason for the loss of market share.

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A railway regulator, if put in place, can lead the way in drawing up and implementing a fare-rationalization road map. Improvement in facilities, higher frequency and punctuality of trains, ease of travel and transportation, and enhanced safety are essential for Indian Railways to claw back volumes. Interestingly, during FY03-FY18, India’s per-capita gross domestic product (GDP) on a purchasing-power-parity basis has grown by 200%, but the per-km passenger ticket price for second-class express trains has risen by just 20%. In contrast, in FY91-FY03, the comparable ticket price increase has been a healthy 88%, in line with the increase in per capita GDP—suggesting that the undercurrent of pragmatic commerce was trumping politics in that period. Not surprisingly, Indian Railways bears sizeable losses (of about Rs34,000 crore in FY17) on account of social service obligations, mainly on lower-class passenger fare discount. Read More

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