“ The primary business of a railway is not to spend               

                                                               money nor even to save money but to earn it; and                    

                                                               as a means to earning money, it must be free to               

                                                               spend it.”

                                                                                                        - Sir Ralph Wedgwood  

 

Introduction

Finances of Indian Railways have registered a magnificent turnaround in 2005-06. It is magnificent because it is achieved without resorting to beaten path of across-the- board upward revision in passenger and freight rates, but by following a fresh transport management strategy of  raising the quality of services, reducing unit cost and even sharing the resultant gain with customers and offering some competition to alternative modes of transport particularly at the higher end of travel. This impressive turnaround has been achieved, as the railway minister aptly mentioned in his budget speech of 2006-07, by the same railway men through their dint of sincere work acumen, devotion and determination. The physical assets were put to maximum use by using innovative methods of operation to bring about this historical turnaround. This smart pick-up in railway finance has happened at a time when experts/economists have been expressing  the opinion that railway finances were  enmeshed in a terminal debt trap.

 

Financial Accounts  of  the Indian Railways : Separation and Key Features

Acworth Committee 1920-21 recommended that the railway finances should be separated from General Finances and it was separated from General Finances in 1924-25. Primary objective underlying this separation was to secure stability for civil estimates by providing for an assured contribution for railway revenues and also to introduce flexibility in the administration of railway finances.

Under the ‘ Separation Convention 1924’ the Railways are required to pay dividend on the capital, which was financed by Central Government, at a rate fixed by the Railways Convention Committee of the Parliament.

Under Article 112 of the Constitution of India, a statement of estimated receipts and expenditures of the Government of India has to be laid before the parliament in respect of every financial year which runs from 1^st April to 31^st March. This statement is known as Budget Statement. Railway finances in India have been separated from the General Finances of the Central Government, hence a separate Budget known as Railway Budget is presented by the Railway Minister. Financial relationship between the Central Government and the Railways is governed by the recommendations made from time to time by the Railways Convention Committee of Parliament.

Budget statement shows the total revenue receipts, revenue and works expenditure, distribution of receipts over expenditure and position of various funds which Railway keep with the Central Government viz., Depreciation Reserve Fund, Development Fund, Pension Fund, Capital Fund and Railway Safety Fund etc.

Revenue receipts of the railways consist of earnings from passenger traffic, other coaching earnings (which include parcel and luggage), earnings from goods traffic and sundry other earnings like rent, catering receipts, interest and maintenance charges from outside bodies and other non-traditional areas such as leasing of right of way, commercial utilisation of land and air space and commercial publicity on rolling stock and station buildings. There are also other miscellaneous receipts like receipts of the Railway Recruitment Boards from sale of application forms and examination fees, etc. and the Government’s share of surplus profits which includes receipts from subsidised Railway companies in which the Government has no capital interest. Subsidy from general revenues in respect of dividend relief and contribution from Central Road Fund for financing safety works is also accounted in miscellaneous receipts. Total of all these items makes up the total receipts of railways.

Expenditure incurred by the railways is on revenue account and on works account. Revenue account consists of ordinary working expenses incurred by various department of railway in their day-to-day working. Other miscellaneous expenditure like expenditure on railway board, audit, surveys and appropriation to depreciation reserve fund, pension fund and dividend payment to general revenue all included in Total expenditure.

 

Trends in Railway Finances: A Summary

Gross revenue receipts of Indian Railways which was Rs. 263 crore in 1950-51 accelerated to Rs. 59,978 crore in 2006-07(BE) i.e. by an impressive 228 times during the fifty six year of its operation. This works out to be 10.2 per cent compounded annual rate of growth (Table 1).

 Net traffic receipts (Gross revenue receipts-Working expenses) at Rs. 53 crore in 1950-51 increased at a slower rate to Rs.9,581 crore and the compounded annual growth rate works out only  9.7 per cent during this period (Table 2). Railways dividend to general revenue rose to Rs.3,871 crore in 2006-07 from Rs. 33 crore  in 1950-51 and CAGR works out 8.9 per cent only (Table 3). The dividend liability of the railways is calculated after taking into account the reduced rate of 6.5 per cent (earlier 7 % on the dividend paying capital of the railways) recommended by Railway Convention Committee in 2005-06 and the latest estimates of capital-at-charge and include dividend payable to general revenue, grant in lieu of passenger tax, contribution to railway safety fund, appropriation to pension fund and payment to differed dividend if any.

The working expenses  rose from Rs.210 crore to Rs. 50,397 crore i.e. by 241 times during the same period. Compounded annual growth rate works out to be 10.3 per cent  which means working expenses have escalated at a slightly faster rate than gross revenue receipts.(Table 1).

Operating ratio, the relation between operating expenses and gross traffic receipts, which was 79.8 per cent in 1950-51 came down to 74.7 in 1963-64, but thereafter it hovered around 83 to 93 percent till 1999-00. In 2000-01 it touched 98.3 per cent , there after there is steady improvement  and it came down to 84 per cent in 2005-06 partly due to increase in operating efficiency such as reducing the turnaround of wagons from 6 days to the reported less than 3 days in 2005-06 and partly due to change in account method such as excluding the lease amount from calculating the working expenses. However, it can be safely said that Indian Railways are one of the most successful railway system in the world in keeping their operating ratio around 90-92 per cent compared to other modern railway system of the world, all of which have much higher operating ratio. Still, in spite of keeping the operating ratio at a comparative low figure Indian Railways have faced utter failure in their attempt to increase their gross revenue to the desired level till 2005-06, as their hands are tied against implementing any rise in passenger fares because of socio-political compulsion and also Indian Railways transport mainly low tariff subsidised bulk commodities. In 2005-06, there was a smart turn around in railways revenue generation. Net revenue as percentage of capital-at-charge varied between 5.8 percent in 1950-51 and 9.0 per cent in 2003-04 and it is budgeted to be about 10.0 per cent in 2006-07 (Table 1). On the other hand, working expenses cannot be brought down as major portion of the expenditure is due to employees remuneration and welfare (Rs.22246 crore in 2003-04), repairs and maintenance (Rs.9493 crore and is budgeted to be Rs.12549 crore in 2006-07) and fuel charges (Rs.7928 crore and is budgeted to be Rs.10822 crore in 2006-07). Ordinary working expenses gone up from Rs.180 crore in 1950-51 to 38,300 crore in 2006-07 (BE) (Table 2). Out of the total working expenses of Rs.38,300 crore , operating expenses viz. expenditure on rolling stock, traffic and fuel formed 52.6 per cent, in this fuel alone  consumed 28.3 per cent. Expenses on repairs and maintenance of permanent ways and works, motive power, carriages and wagons, and plant and equipment forms about 32.8 per cent (Table 4).  Hence serious efforts are called for by Indian Railways to increase their revenue when ever it becomes necessary. However, mere increase in tariff of 8 to 10 per cent in the next five years as recommended by Shri Rakesh Mohan Committee (IR –2001), is not sufficient, the more important objective should be to increase the productivity by adopting  innovative operating strategies and efficiency of employees and also efforts should be made to reduce operating expenses. Here it is worth mentioning that the average increase in freight traffic in terms of net tonne kilometre has been 21.0 percent per year and in passenger traffic passenger kilometres is 16.5 percent during the last 56 years. This clearly shows that with a low rate of investment in inputs, the indices of traffic output have shown a remarkable achievement.

Appropriation of the Surplus

The excess or short fall in revenue i.e. the  residual after discharging the dividend liability rose from Rs.15 crore in 1950-51 to Rs.32 crore in 1960-61 , but there after due to comparatively low net revenue receipt there was short fall in revenue of Rs 20 crore and Rs. 198 crore in 1970-71 and 1980-81 respectively. However, from 1985-86 Indian Railways registered only excess in revenue in the next 21 years and in 2006-07 it is budgeted at Rs. 4,673 crores (Table 1). The excess revenue is appropriated to the development fund, the safety fund and the capital fund, depending upon the actual needs. These funds are meant to finance part of plan requirements. However, appropriation to capital fund is made only after necessary appropriation to development fund and safety fund. In case there is a no excess or not enough excess to be transferred to development fund and capital fund, temporary loan is obtained from General Revenues to finance the expenditure to be met out of these funds. Development fund is used to finance expenditure on passenger and other railway users’ amenities work, staff welfare work, un-remunerative operating improvements and safety works. Safety fund is used for financing the work relating to conversion of unmanned level crossings and for construction of road over bridge (ROB), road under bridge (RUB) at busy level crossings. Capital fund is used for works chargeable to capital. The movements of resources in these funds for the last decade is depicted in Table 5.

In addition to these funds, in 1999 RCC recommended setting up of another fund viz., Railway Safety Fund  (RSF) and it is in operation w.e.f 01-04-2001. The RSF is financed through railway revenues, transfer of funds by the central government from the central road fund and contribution made from the railway safety works fund out of the dividend paid to the general revenue. This fund is mainly used for building road over bridge (ROB) and road under bridge (RUB) with the aid of state government.

Works expenditure is financed from capital borrowed from the general revenues and also by internal resources viz., capital fund, depreciation reserve fund, development fund, railway safety fund and from revenue in the case amenities and improving un-remunerative operating improvements when the overall expenditure is below certain limits. The internal generation of revenue, which was Rs.275 crore in 1980-81 rose to Rs.10610 crore in 2006-07(BE) or at an average annual growth rate of 15.1 per cent during the last 26 years . At the same time contribution from general revenue grew at a slower pace of 9.7 per cent  (Table 6). The uses of resources reveals that while the addition to assets rose from   Rs. 611 crore to Rs. 7,424 crore, the replacements of assets rose substantially from Rs. 940 crores to Rs. 16,285 crore. Repayment of loan with interest in 2006-07 (BE) is Rs. 1,539 crore.(Table 6).

Deferred Revenue Fund (DRF) is a transitory fund used in adverse circumstances when Indian Railways are not able to defray its obligation to pay dividend to general revenue for the capital asset which had been procured from the financing provided by general revenue i.e. the capital-at-charge . The outstanding in this fund is a liability of the railway and is paid back in lump sum or in instalment by railway when the circumstances become favourable to do so. The outstanding in the fund in 2001-02 at Rs. 2,823 is brought down to Rs. 664 crores in 2006-07 by railways.

Freight Traffic

Freight Traffic is the backbone of the Indian Railway Finances as it provides about 65 to 70 per cent of the total earnings.

IRs witnessed a phenomenal growth in freight traffic during the past 56 years.

Revenue earnings from originating tonnage in freight traffic has gone up by 289 times i.e. from Rs.39 crore  in 1950-51 to Rs. 40,320 crore in 2006-07 (BE) i.e. by  a massive 28,907 per cent  with an average annual growth of 516 per cent during the 56 years. Today IRs carries nearly 2 million tones of freight traffic every day. However the average lead for freight traffic ie average distance travelled by one tonne of revenue earning goods gone up  from 513 kms in 1950-51 to 754 km in 1980-81 , there after it dipped to 660 kms by 2000-01 and it hovered around there till now. Consequently, net tonne km i.e. transportation of one tonne goods over one kilometer , moved up by 442 billion NTK to reach 480 billion NTK in 2006-07(BE) from 38 billion NTK in 1950-51 thus registering an annual increase of 20.8 per cent . Average rate per tonne km which shows the impact of the increase in freight rates has been consistently going up from 3.2 paise in 1950-51 to 84.1 paise in 2006-07 at an average annual growth of 29.1 per cent during the last 56 years (Table 7). But, at the same time, the average cost of transportation of commodities had moved up much faster than the average rate of earnings per tonne kilometre.

Freight rates on IRs are tailored to meet the needs of the economy and are basically based on the principle of gross subsidization. This made the spread of freight rates very wide. More over large number of commodities moved by IRs in unit train loads. These commodities, known as bulk commodities includes coal, cement, fertilizers, mineral oil etc. Railways encourage movement of unit train load commodities and hence introduced unit train load rates which are much lower than the normal wagon load rates. These bulk commodities forms about 90-95 per cent in all the last five and half decades of IRs operation. More over IRs have to fulfill their social obligation also by moving commodities like food grain, sugar, salt, sugar cane, oil seeds, bamboos, fruits and vegetables etc. The loss incurred in moving these commodities was Rs. 329 crore in 2002-03, however it is estimated to be only 55 crore in 2005-06 .

Trend in composition of revenue-earning freight traffic indicates that coal movement, remains  the main revenue earner for the Railways as it forms about 39-42 per cent of total earnings. The earnings per net tonne kms of coal at Paise 89 in 2006-07 is better than that of the earnings from fertiliser, foodgrains etc (Table 8). Commodities like iron and steel, mineral oil, cement and non-ferrous metals, which are usually moved in net train load, are high profit yielding commodities as compare to fertilizer and ores. If IRs can attract more of net train load of above profit earning commodities, it can earn more revenue. Although traffic in Mineral Oil, Cement etc. has not shown any drop during the past 56 years, in respect of many other commodities there has been a consistent drop in tonnage during this period. The shift of non-bulk profitable traffic to the road transport has been adversely affecting the finances of the railways. A study conducted by the Indian Foundation of Transport Research and Training revealed that while freight traffic in railways has grown by 30.6 per cent in the last five years, inspite of the rising fuel prices and tyre prices, freight traffic by roads have grown up by 53.1 per cent  during the same period. Moreover, during this 5 year period cost of transporting by road transport has grown by 66 per cent , the freight charges of the railways in the same period have grown only by 8 to 10 per cent . Road transport sector had increased their capacity additions by 822 million tonne by adding a fleet of 10.60 million goods carriages , on the other hand railway has increased its capacity by 8 to 10 per cent in the past five years. Both the mediums of transport have their own advantages. The tremendous increase in road freight traffic despite odds only prove that there is no alternative to the last mile connectivity that road provides which pips railways in the over all freight traffic. The study also reveals that the roads have larger share in retail parcel cargo over shorter distances than railway . Railways were preferred over road when high density cargo like cement and iron ore were to be hauled over long distances. 

IRs have taken a number of steps to increase the net load per wagon and the net load per train which resulted in commendable performance. These efforts are visible as the average net load per train on IRs  have been going up from year to year. Average net load per train in 2003-04 was 1,526 tonnes on BG against 489 tonnes in 1950-51.

Effective utilization of the locomotive has shown good improvement as the net tonne km per engine hour which were 3,283 km for BG in 1950-51 have rose to 16,723 km in 2003-04. More over net tonne kms per goods train hour which  was 8,590 for BG in 1950-51 have gone up to 39,770 in 2006-07 i.e. by 363 percent showing an average increase of 6.5 percent per year during the last 56 years.

Wagon kms per wagon per day went up from 62.3 kms in 1950-51 to 187.3 kms in 2003-04. As a result Net tonne kilometers per tonne of wagon capacity per annum which were 11,833 kms in 1950-51 increased to 42,237 kms by 2003-04  and Net tonne kms per wagon per day recorded a compound annual growth rate of 2.5 per cent during the last 53 years.

Track utilization is measured by density of traffic in terms of Net tonne kms per route kms in BG has been improving year to year , NTKms increased to 8.14 million in 2003-04from 1.50 million in 1950-51 i.e. by almost 6 times during the 53 year period.

In spite of massive dieselization and electrification, the improvement in average speed of goods trains is minimal i.e. from 17.4 km/hour in 1950-51 to 23.3 km/hour in 2003-04.

Wagon turnround   was 11 days for BG in 1950-51 with an average lead of 513 kms has came down to 6.7 days in 2003-04 with an average lead of 684 kms. It has reported that wagon turn round would be less than 3 days in 2005-06.

However, some questions remain to be answered, the important one being that with the present capacity of wagons whether IRs can increase its total freight volume with its rickety rakes whose freight over-loading has already gone up by 10 to 17 per cent. The carrying capacity per wagon has been increased to 65 tonnes.  Moreover, without adding new wagons , cut in freight unit cost to 53 paise per net tonne km from 61 paise per net tonne km in 2000-01 will reach saturation point soon.. Hence, the Railways have to concentrate on overcoming capacity constraints to increase their revenue earnings. In this connection, it may be mentioned that in the budget speech 2006-07 railway minister has told that RDSO is designing new high capacity wagons which can carry upto 70 tonnes. Also by using  aluminium and stainless steel the payload to tare weight ratio will be brought down. He also told that in the future the Railway is intend to manufacture 25-tonne axle load wagons which can carry loads upto 80 tonnes  and whose  payload to tare weight ratio is around 4:1.

Passenger Traffic

The Indian Railway system is one of the biggest transporters of passengers in the world. IRs,  which transported 1,284 million passenger in 1950-51 , in the next 56 years i.e. in 2006-07 carried 6,400 million passengers. Passenger kilometres involved in this huge transportation activity were 682,655 million in 2006-07 which is about 18 per cent of total world railway passenger kilometres. In 1950-51 the passenger kilometres was 66,517 million. The overall passenger carried by IRs have been of the order of 398.4 per cent showing an average annual rate of increase of 7.1 per cent. It means IRs carries 17.5 million passengers a day .

Passenger earnings rose from RS. 98 crore in 1950-51 reached Rs. 16,800 crore in 2006-07, out of which lower class earnings was Rs. 13,627 crores in 2006-07 as against Rs. 85 crores in 1950-51. Though there is a substantial increase in passenger earnings the average rate at 25 paise per kms in 2004-05 is still the lowest as compared to any other mode of transport (Table 7). It is on account of this low rate that the IRs is losing substantial amount. Many committees recommended increases in passenger fares seeing the ever widening gap between cost of providing service and the return from the same. But social and political compulsion kept the rate at the low end.

While the transportation effort involved in dealing with passenger traffic is substantial, IRs is recovering hardly 28 per cent of their total earnings from passenger traffic . The freight traffic yields about 72 per cent of total railway earnings in 2006-07. Hence there is every reason why passenger traffic should not contribute at least one-third of total railway revenue at any given time and for each financial year to cut down passenger traffic losses. It is interesting to note that the cross subsidy in passenger fares had touched Rs.4,500 crores  due to unchanged ticket fares for the last three years.

Earnings per passenger kilometre which was 12 paise in 1991-92 more than  doubled at 25 paise in 2004-05. While the earnings from upper class grew by 2.3 time during the said period , the growth in earning from second class was only 1.9 times. Non-suburban earnings went up from 13 paise in 1991-92 to 27 paise in 2004-05. upper class non suburban passenger paying 2.1 times more in 2004-05 compared to what he was paying in 1991-92.(Table 9 ).

Table 9 depicts passenger earnings, passenger kilometre and earning per passenger kilometre which reveal how suburban travel is subsidised by non-suburban travels and second class travel is subsidised by upper class travel. Suburban passenger  traffic earning 13 paise per passenger kilometre in 2006-07 is said to be the lowest amongst  many modes of transport. Suburban passenger fares  were fixed at a very low level in 1950-51 and the practice has been followed till now. However, this kind of soft approach to suburban passengers can be justified on the following grounds.

1.      Suburban trains in India are the most overcrowded, especially in cities like Mumbai, Madras and Calcutta , which makes suburban travel a nightmare to the passengers. This overcrowding is more than 4-fold of the coaches’ capacity in peak hours in second classes. Moreover, in second class suburban travel there is no such peak hours now a days in cities like Mumbai.

2.      The services provided by the Railways in suburban train is nothing to write about.

3.      All the more, the losses incurred by the Railways due to high subsidisation of suburban passenger travel  is meagre because of heavy overcrowding.

4.      Railway Minister has reduced the suburban fare by Rs. 1 each a year ago (March 2005). This could have been avoided and the resources generated could be better utilised for giving improved services for the highly harassed suburban passengers. Of course, in recently days the Railways have been trying to upgrade their suburban services. Once the Railways are successful in their endeavour to give a comfortable travel to their suburban passengers, it can think of raising their income from this source by enhancing the tariff rates.    

Even among different segments of passenger traffic, the Indian railways have shown more than due consideration to passenger travelling on monthly season tickets in the suburban section.

Passenger Fares and Freight Charges

The Indian Railway, no doubt, is the cheapest mode of transport in India . It seems this is also the bane of the Indian Railway System . In order to keep passenger tariff  low,  it is greatly cross-subsidised by freight tariff, and within the passenger tariff, there is cross subsidising of lower class fares by over charging higher class travel. These cannot be carried beyond a point because overcharged freight migrates to road and overcharged upper class passenger traffic  to air. To put railway fares on rational basis it is essential to establish a rail tariff regulatory authority. Approach paper to the 11^th five year plan, (Planning Commission) recommends rationalisation between passenger and freight tariffs. As early as in 1982-83, the National Transport Policy Committee and the Rail Tariff Enquiry Committee had both stressed the imperative need for rationalisation of the fare structure and its alignment with cost. National Transport Policy Committee has even pointed out that while the Railway cost of carriage of short distance passengers is much higher than that of the roadways, the railway fares are far lower in comparison with the fare charged by the road transport. Hence it is considered prudent that this imbalance should be progressively corrected.

In the past, selective segments of passenger traffic were subjected to ad-hoc increases in fares. This has resulted in several distortions in the overall and relative fare structure. Fare structure was to be rationalised by smoothening  and establishing relativity of fares of various classes of travel. This would help in improving revenue generation from passenger traffic. Ratio of passenger earning per passenger kilometre to freight earning per tonne kilometre gives an idea about the distortion in pricing. A ratio of one is widely believed as a financially desirable norm. A World Bank study has compared the ratio of passenger and freight earnings per unit. In China, Austria, France and Korea, this ratio is more than one  and it is around 0.6 to 0.8 in a few other countries, viz., Indonesia, Malaysia, Thailand, while in India this ratio was 0.5 in 1951 and has steadily came down to 0.3 in recent years, which is one of the lowest in the world. This indicates that the Railways suffer from drastic distortions in pricing as reflected in the ratio of passenger earning to freight earning which is around 0.3 per cent in recent years. In this context, the Expert Group on Indian Railways 2001 (Chairman: Rakesh Mohan) has recommended an annual adjustment of about 10 per cent increase in second class sleeper fares and 8 per cent in second class ordinary fares on a continuous basis for about five years, assuming about 6 percent inflation. The Budget for 2006-07 introduced a dynamic pricing policy for freight and passenger traffic. Passenger tariff  was proposed to be rationalised so as to reduce the fares at the top end by 18 per cent and 10 per cent for AC-I and AC-II class. While there is no across-the-board increase in freight tariff, albeit some sort of rationalisation has occurred by reducing the number of commodity groups from 80 to 28. Freight rates of highest classification was proposed to be reduced and made less than double than that of  the lowest classification over the next three years.

The Budget proposed to introduce a ‘Dynamic Pricing Policy’ for freight as well as passenger for peak and non peak seasons, premium and non-premium services and for busy and non-busy routes. According to this policy, while the rates for non-peak season, non-premium service and empty flow direction will be less than the normal rates, the rates for peak season and premium services would be higher than normal. The non-peak season for the freight segment would be between July 1^st to October 31^st and for the passenger segment it would be between January 15^th to April 15^th  and July 15^th to September 15^th.

Social Obligations

Dual role of a public utility and a commercial undertaking imposes on the Railways the obligation to meet the transport requirements of all sections of the community along with the attainment of socio-economic objectives. Also, the Railways have to generate adequate revenues to meet the total expenses of running the enterprise and provide for the development and plough back for dividend. The Railways do not have total freedom to adjust their freight and fare corresponding to increases in the price of various inputs used by them. In view of this, the Railways sustain losses in the operation of suburban and short distance passenger services and uneconomic branch lines. Further, certain commodities, specially those which are required for consumption by the poorer sections of  society and which  have a direct bearing on the cost of living of the masses, like food grains, salt for edible use, fruits and vegetables, etc. are carried at concessional rates which do not cover the cost of operation. Besides, relief supplies to flood-hit and drought-hit areas are carried free of charge. These are the social obligations, i.e., social costs which railways are called upon to bear as a public utility undertaking. The financial cost of such obligations of the Railways is estimated to be about Rs.8,545 crores in 2005-06 as against only Rs. 124 crore in 1970-71. This social cost works out to 15.6 per cent of the  gross traffic receipts or 18.7 per cent of the gross working expenses and it was 12.3 per cent and 14.6 per cent, respectively, in 1970-71 (Table 10 ).

Most foreign railway systems get financial support from their exchequers for financing social service obligations out of the operation of uneconomic services. This is done to provide a cost effective and eco-friendly transportation. This support is provided in various forms and for different purposes like:

1.      Compensation for losses on account of socially reduced tariffs.

2.      Outright grants to cover deficits.

3.      Soft loan to meet deficits

4.      Financial support to maintain viability of the system and earn marginal profits.

5.      Writing off of accumulated debts and unproductive capital.

6.      Support for investment and infrastructure maintenance.

According to the statistics published by Jane’s World Railways (2004-05 edition), the state support provided to some foreign railways for meeting social services obligation viz-a-viz Indian Railway is shown below.

State Support in Some Selected Countries’ Railway Systems vis-à-vis the Indian Railways

 

In addition , Indian Railways have to incur another financial burden on account of Uneconomic Branch lines. Based on the recommendation of Uneconomic Branch Lines Committee, 1969, all narrow gauge lines and such lines that join the main line network at one end only are termed as branch lines. A review of such lines during 2004-05 indicated that 110 (50 BG, 39 MG and 21 NG) branch lines were uneconomical and the Railways incurred a loss about Rs. 405 crores excluding dividend, on their account. Several high-level committee have unanimously recommended that all such uneconomic branch lines, where alternative modes of transport exist or can be developed, should be closed down so as to reduce, to the extent possible, the losses which accrue to the Railways year  after year. However, state governments are reluctant to do so.  Hence it is suggested that if state governments do not agree to close down such lines, state governments should share Railway’s loss at 50:50 basis. Instructions have been issued for closure/dismantling of 21 such lines .In order to enable state governments for closure of the remaining 38 lines, the Railways are ready to offer financial assistance.

The Railways are justified in closing huge loss-making lines. But the question is whether such closures are justified only because these services are loss making. The Railways are duty bound to continue with these services as a social obligation. Moreover, the Railways are more eco-friendly and cheapest mode of transport as compared to road transport  The Indian Railways have shown to the world that they can turnaround the entire system into a vibrant one. Hence, instead of trying to close these lines or going to state government for a contribution to the extent of 50 percent  revenue losses, they should see how to make these lines more viable by increasing their operational   efficiency after finding out  what ails these lines.

The principle for the Railway services should be that supply creates its own demand.

 

Indian Railways’ Assets and Liabilities

 

Capital-at-charge for the Indian Railways as set out in the accounts is the sum made available by General Revenues for investment of the Railways. This sum extended to Railways is a kind of perpetual loan and railway pay a dividend to general revenues every year at the rate fixed by railway convention committee. It is 6.5 per cent of the capital-at-charge in 2005-06. It excludes cost of assets created out of depreciation reserve fund, development fund, capital fund, railway safety fund and special railway safety fund or revenue. On the other hand, the Block account – forming an annual appropriation account for the Railways indicate the total capital assets including the value of assets financed from the above funds. Table 11 shows total value of railway assets under broad categories from the Block account excluding only value of assets created from revenue as their replacement will be financed from current revenue. It can be seen from this that while 52 per cent of assets created from the finance from general revenues, 48 per cent of the Railway assets creation finance came from other funds. More over this funds financed 55 per cent of standard engineering works and 45 per cent of rolling stocks in 2005. This share was 25 per cent and 8 per cent in 1977 which shows the reliance of railway more and more on other funds ie internal resource generation and public borrowings rather than general revenue in recent years.

Performance of Zonal Railways

Indian Railways, for administrative consideration, is divided into 16 Zonal railways as per geographical areas. It was only 9 zonal railways till 2002-03, but 7 more zones were created in 2003-04.

            The performance of the newly created zonal railways during 2005-06 were impressive . However, four zonal railway viz.  southern railway, eastern railway, north eastern railway and north-east frontier railways were perpetual loss makers. Their operating ratio ie working expenses  over gross earnings expressed as percentage were always more than 100 (Table 12). This continuous loss making  cannot be ascribed to high social expenditure  in these zones. Hence  railway have to study these zones performance and find out what ails them and take corrective measures to rectify the illness so that these  zones can be more productive.

Will this turnaround model sustainable ?

The year 2005-06 was the golden year in the history of the Indian Railways as it is the year when the Railway finances have registered a magnificent turnaround in spite of various experts warning that IR was heading to a terminal debt trap. This dramatic turnaround, as iterated by the railway minister in his budget speech 2006-07, is achieved by the sincere and efficient work of its 1.4 million employees using the same infrastructure in an innovative and efficient way without resorting to the beaten path of across-the-board upward revision in freight and passenger tariffs.

Nevertheless, the question is, will this be sustainable or is it a short-term phenomenon. All the presently available indicators are not sufficient to make a honest judgement. However, if one goes by the first quarter performance of the Railway in 2006-07, the present euphoria will at least continue for the current  year too and the Railways will achieve its budgeted income.

The modern management mantras: unit costs, volume increase and competition, all these are apt if the system can take the increasing work load, which it is suppose to take. The Railway’s capacity augmentation model to achieve higher revenue targets is not sustainable in the long haul- thus opine transport analysts and management gurus. Freight overloading on the rickety rake has already gone up from 10 to 17 per cent. Wagon turn-around is reached less than 3 days by resorting to 24 hours loading and unloading. Without adding  new wagon with preferably 80 tonnes loading capacity, cuts in freight unit cost is unlikely. The attempt to contain passenger losses by increasing seating capacity and occupancy will have some impact in increasing the revenue, but it cannot be stretched beyond a point with the existing infrastructure.

V K Agarwal, former chairman of Railway Board, while appreciating the effort put in by the railway employees also adds that much of the turnaround story have to do with a booming economy. He is of the opinion that wagon capacity cannot be increased from the present level of 65 tonnes. One way to overcome capacity constraint is to add a few more lines to busy segments before the dedicated freight corridor actually comes up.

Another former Railway Board chief, Ashok Bhatnagar, is of the opinion that the real challenge for the Railways is to enhance the carrying capacity as lack of demand is not the problem , but the ability to keep pace with 8-10 per cent growth in freight volume in the next decade  which is about 700 million tonnes now.

Some analysts suggests that IR should have at least 6 corridors connecting 4 metros. Overloading is just an interim measure. More and more lines that can give business must be developed urgently.

The Indian Railways, by going high tech, are trying to improve efficiency and reliability of services and also scale down operating and maintenance cost to increase profit.  By adding 10 more coaches to the existing 14 coaches, the Railways will augment seating capacity in about 190 popular passenger carrying trains. This additional capacity will enable the Railways to earn Rs. 200 crore additionally every year. The Railways have already purchased engines capable of pulling this longer train. However, the platform length in many stations has to be lengthened to accommodate these 24 coach trains. Railway wishes to introduce a device called End of Train Telemetry (EOTT) to communicate with engine drivers and to provide information about condition at the rear of the train that are important to the operation of train such as brake pressure and car motion. By introducing this technique, Railways can avoid rear guard wagon or can convert them into passenger coaches. The Railways are also working one new signalling and collision devices as well as use of GPS for tracking trains. The Railways also want to introduce high-speed bullet trains to connect inter-cities. Railways plan to manufacture 25-tonne axle load wagons which can carry loads up to 80 tonnes and whose payload to tare weight is around 4:1. In order to increase the share of the Railways in the transportation of commodities like motor vehicles, petrochemicals, etc. the Railways need special wagons , the technology for which at present is not available in India . The Railways will provide the necessary policy framework to import technology for manufacturing such special wagons. The  double stacker container trains are already on the rails and the Railways hope this is likely to make rail based container transportation more economical and competitive. All the above schemes require massive investment.

Commercially, the world rail transport has had a mixed record. Most rail systems, including urban rapid transit systems, are highly subsidised and have never or rarely been profitable, though their indirect benefits are often immeasurable. However, the Indian Railways performance in the last five and a half decades ahs been  highly impressive also in fact their performance has been profitable in a majority of the years. Passenger rail in nearly all countries is dependent on government subsidies, but the Indian Railways get a very meagre amount as subsidy vis-à-vis their operating expenses.

Now, the Indian Railways, like the Indian economy, have entered the threshold of a new century. The achievements so far have been indeed commendable, but the gap is equally mind boggling. The Railways have got about 235 projects pending for implementation. The resources generated in recent years though impressive, are barely sufficient to get these projects going, but in the meantime, new demands, like introduction of Bullet Trains and construction of a ‘Dedicated Multimodal High Axle Load Freight Corridor’ with computerised control, have been thrust on the system. The Railway are anxious to fulfil them too. But, they will have to adopt equally innovative methods’ to finance and execute them. Hence, they have to encourage public partnership and promote schemes of public-private partnerships on a massive scale for the expansion and development of this vibrant and premier railway system in the world and serve the transport needs of 1.3 billion populace by effecting significant improvement in rail services. Also, corporatisation of  the railways, with specified social goals should be the eventual strategy to attain all of these goals set out above.

* This note is prepared by R.Krishnaswamy

 

References

 

1. GOI (2006): Budget Documents 2006-07, Ministry of Railway, February and previous issues.
2. GOI (2005): Indian Railway Year Book (2005), Railway Board, Ministry of Railway and Previous issues.
3. Saxena, R N (1991): Four Decades of Indian Railways, January 19.
4. RBI (2006): Railway Budget 2006-07: Review and Assessment, Reserve Bank of India Bulletin, May and previous issues.
5. Media sources.