Merging the Railway Budget with the General Budget had appeared nothing short of a revolution. The Railway Budget after all had been presented for 93 uninterrupted years. But if hopes were triggered, they seem to have been dashed. The 2016-17 Rail Budget itself had charted an ambitious road-map for the Indian Railways, namely time-tabled freight trains running with credible service guarantees; reserved accommodation on passenger trains made available on demand; average speed of freight trains to rise to 50 km/h (from 23.70 km/h currently) and of Mail/Express trains to 80 km/h (from around 60 km/h); semi-high speed trains running along the golden quadrilateral among several other promises.
Little of all this has happened, notwithstanding the hype and hyperbole. Caught in a low incremental growth trap, and continuing to ignore ominous portents of living beyond its means, the nation’s crown jewel, that the Railways is, has been steadily and inexorably moving on the footprints of Air India, the tragic Maharajah on his magic carpet.
It has limped along, the presiding deities in Rail Bhawan adrift and caught in a chakravyuh , the top technocrats, docile and pusillanimous, content with nurturing their own petty ‘principalities’, remaining oblivious of the gathering storm.
How could the stately citadel crowded with over 150 Joint Secretary-and-above level seasoned professionals not comprehend the gravity of the slide under their watch?
• IR’s freight NTKM (Net Tonne Kilometer) recorded a dismal 0.26% CAGR (Compound Annual Growth Rate), likewise a CAGR of 0.53% in passenger PKM ( Passenger-Kilometer) over a five-year period 2014-19;
• Its working expenses clocked a CAGR of 5.54%, higher than its gross earnings, which grew at just 4.09% CAGR.
• The FY 20’s first 6-month (April-September) report card brought no cheer: freight receipts fell short by 16.97% and passenger earnings 5.3% of the budgeted amount; gross revenue fell 14.54% short of the budgeted amount, but working expenses rose 4.15% higher than budget estimates.
• IR’s receding operating efficiency is clearly discernible in the ratio of net revenue receipts to capital-at-charge, which plummeted from 6.95% in 2014-15 and 7.0% in 2015-16, to 1.62% in 2016-17 and 0.51% in 2017-18.
Explaining the “failing financial health of Indian Railways”, the 2019 Report of the Comptroller and Auditor General (CAG) refers to its “steadily declining performance” reflected in the Operating Ratio (O.R.), which, at 98.44% in 2017-18 “was the worst or the highest in the last ten years”.
Lower the operating ratio, healthier are its finances. Or means that Indian Railways spent Rs 98.44 to earn Rs 100. What now looks to be a familiar pattern, IR resorts to considerable window dressing to register a somewhat less frightening operating ratio: e.g., under-providing for depreciation, transferring many revenue-chargeable expenses to capital expenditure, seeking advance receipts against freight charges payable by some large customers.
The CAG report adds that IR’s O.R. in 2017-18 would have been 102.66% “but for the advance received from NTPC and IRCON”.
The report further refers to IR’s 26.14% share of internal resources in its total capital expenditure in 2014-15 decreasing to just 3.01% in 2017-18.
The 2019-20 budgeted estimates peg IR’s total outlay on capital account at Rs 1,60,175.64 crore, highest ever for a year, that includes Rs 65,837 crore by way of Budgetary support, Rs 10,500 crore internal resources, and Rs 83,571 crore from extra-budgetary sources.
An increased reliance on borrowings will further exacerbate its “grave financial situation”, warned the CAG. Again, constant under-provisioning for depreciation through the Depreciation Reserve Fund (DRF) has already resulted in piling up of ‘throw forward’ works estimated to be at Rs 1,01,194 crore, for replacements of rolling stock, track renewals, bridge works, signalling and telecom works, besides machinery and plants.
Amidst a flurry of several schemes and plans that IR has outlined, involving huge investment outlays, there is a palpable unease among some highly experienced rail executives who, although convinced of the need to substantially strengthen and restructure the network and its services, feel the basic core issues do not seem to be on the radar.
They apprehend that the already perilous state of its finances will be compounded with the sharply rising debt burden. Its lease hire charges keep mounting; provision of Rs 11,489 crore for FY 2019-20 aggregates 5.6% of total working expenses: wage bill budgeted at Rs 86,554 crore together with Rs 50,100 crore as appropriation to pension fund accounts for over 66.9% of total working expenses of Rs 205,500 crore. Contractual payments at Rs 8,546 crore represent another 4.16% of the total working expenses.
A general popular perception endures- of railways moving rudderless. Its core business– freight as well as passenger carriage - constantly losing market share, its finances wan and dreary, its stewards, preventing it from following simple business norms of optimally pricing its services and judiciously restructuring investments,
Freight accounts for approximately 35% of the 20,000 trains that run on the network each day, generating 75% of IR’s revenue. By irrational cross-subsidising passenger services, it has been out-pricing itself in the freight market. The just-announced passenger fare hikes amount to ‘much ado about nothing’. The annual projected gain would only be Rs about 2,000 Crore, while IR currently sustains an annual loss of the order of Rs 35,000-40,000 crore on its passenger business.
The ‘Upper Class’ (mostly AC-I, II, III, and chair car) accounts for less than 2% of all rail passenger journeys, though 10% of passenger kilometres (pkm), and 33% of all passenger earnings. The Mail & Express Second Class forms about 17% of total passengers, 55% of pkm, and 50% of earnings; the Ordinary Second Class segment accounts for 25% of all passengers, 23% of pkm, and just 11% of earnings; the intra-city Suburban services account for over 56% of total passengers, 13% of pkm, and only 6% of total passenger earnings. The highest increase (4 paise/km) just effected in AC classes will potentially hurt railways’ passenger earnings in as much as this segment is constantly under pressure of low-cost air carriers. IR’s fares for non-suburban lower classes as well as a suburban sectors have for long been irrationally low and static, in fact, far lower than the average bus fares. Monthly season tickets have been grossly inconsistent with any rational fare structure, and are misused in many cases. Government hasn’t realized the serious adverse impact that such low rail fares create in encouraging short distance travel on railways when the short distance mobility must optimally be catered for by road or dedicated high-density regional rail corridors.
For our Railways, danger is the future. On passenger side, IR already faces severe competition from rapidly evolving aviation sector, new style, high-capacity buses; for freight, high capacity trucks carry goods door-to-door, time-definite, convenient and economical on fast-expanding highways network. Imperative is it for IR to reorient and re-dimension its freight transportation strategy, to improve its product, calibrate its services to create a critical mass of piecemeal wagons/containers, in partnership with other players, for time-tabled multimodal logistics services end-to-end.
Railways across the globe are grappling with macroeconomic changes – staple flows, for example, of coal, steel, petrochemicals, etc., cannot be relied upon. The annual loss of more than Rs 1,100 Crore on parcel and luggage segment should compel IR to forge partnerships with established road network operators/integrators to develop a door-to-door multimodal product.
Tectonic changes happening in large railways in the US, EU, China, and Russia for high velocity, price-competitive, overnight inter-city parcel, and freight delivery transport systems would be worthy of emulation.
So also for passengers, it needs to reorient, accelerate and modernise the entire wherewithal, push through the plans to involve private players, develop the whole panoply of modern terminal infrastructure, allied pre-board, and on-board services, especially for medium and long-distance inter-city travelers, and corporatize suburban and short distance ‘regional’ services.
IR is on a critical cross-roads; there appears to be an awakening evident in some crucial decisions now being taken at long last, such as the move to corporatize its production units, involving private players to operate advanced inter-city passenger services on some 100 selected routes, and initiating some belated reforms to revamp and restructure the organization at the apex level.
Above all, railways must first shed its widely, and mistakenly, the perceived role of a departmental undertaking with public service obligation and, instead, perform as a corporate entity with inalienable responsibility to carry the nation’s freight and passengers adequately, efficiently and economically.
A rigid bureaucratic structure is antithetical to a business ethos. Most railways world over, including largest systems in Russia, China, Germany, France, Britain, et al, are now autonomous corporate entities, having shed their garb of government departments. IR has stubbornly stuck to its departmental character, inevitably perpetrating bureaucratic rigidities and wallowing in competitive frailties of babudom.
The bigger the organisation grows, the more it tends to grow. IR’s wage bill keeps ballooning. Soon salaries and pensions will swallow three-fourths of IR’s working expenses budget. Instead of drastically pruning its headcount, especially in the context of substantial induction of newer technologies and outsourcing of myriad activities and services, IR has been splashing its “biggest recruitment exercise” to hire hundreds of thousand additional employees, when it needs to deftly, and firmly, handle the secateurs ﬁrst in the Kafkaesque Rail Bhawan, then right across the sprawling system - its vast web of installations – workshops, loco sheds, repair depots and ‘sick lines’, stations and yards, colonies and offices, its protection force.
India’s most important enterprise, IR is too vital to be allowed to falter. It needs to heed how some of the most successful companies faded into irrelevance – because, stuck into their grooves, they remained complacent amidst arrogance of their size and success, without adapting their businesses and structures to brewing disruptions in markets, trends, and technologies, while the challenge for them is to embrace creative destruction and invent the future.
A key challenge for leaders today is to create a sense of urgency in the organisation. It can be fatal not to be paranoid about the vulnerability of one’s current model and plans.
(The author served the Railways in various capacities and has retired. But he remains an avid observer. Views expressed are his own)