The Hindu Business Line : Quo Vadis, Indian Railways?

The title in Latin of a biblical Hollywood blockbuster, meaning "Whither goest thou?", may seem an inappropriate question to pose the Indian Railways (IR), when by all accounts, there has been a remarkable "turnaround" of its finances. Yet it is exactly because the IR seems better off financially today than at any time in the recent past that the question needs to be asked, lest a feeling of complacency and self-congratulation sets in within the organisation and among the other stakeholders, blurring certain key issues that need to be addressed in the near future.

At the outset it is necessary to place the recent remarkable improvement in Railways' finances in proper context. The foundation of the recent financial "turnaround" is claimed to be `the increase in loading capacity by 100 million tonnes and generation of over Rs 5000 crore in freight revenues through reduction in wagon turnround and through additional loading of 4 to 8 tonnes per wagon'.

Instructions enhancing the permissible carrying capacity of different types of wagons by 4 to 8 tonnes (EPCC, for short) were issued in stages, spanning about 8 months of 2004-05 and the whole of 2005-06. Figure 1 shows the trend of originating loading over the last ten years and the annual incremental loading:

Two facts stand out:

The upswing in the loading started around 2001-02 i.e., more than 5 years ago

If the additional loading due to EPCC were not available during 2004-05 and 2005-06, the loading curve would have drooped slightly after 2003-04.

The actual benefit in terms of physical loading and earnings due to EPCC, estimated by calculating the difference between the Budget Estimates and actuals works out to only about 50 million tonnes/Rs 2,600 crore (the exact figure is 55 million tonnes. I have allowed 5mt for other operational improvements. Earnings are calculated on the basis of a yield of Rs 52 crore/1 million tones of originating loading) , nearly half of the claimed benefit, after allowing for other operational improvements leading to a reduction in wagon turn round.

The balance of the difference between the budgeted and actual earnings (Rs 5,043 crores), amounting to about Rs 2400 crore was due to the upward reclassification of selected commodities, outside the glare of the annual Budget, effectively raising their tariff rates, first on November 27, 2004 and next on December 1, .2005.

Seen in the correct perspective therefore, the EPCC strategy, rather than being the foundation of IR's "turnaround", was more in the nature of a quick, one-time measure for maintaining the loading trend on course. No doubt, in tandem with reclassification, it has led to a significant "surge" in the earnings of the IR during 2004-05 and 2005-06 (as reflected in the steep rise in GTR, Figure 2).

It however needs to be remembered that the unusual step of enhancing the carrying capacity of wagons by 4 to 8 tonnes (EPCC) could not have been taken in July 2004 and onwards but for two favourable circumstances, against the backdrop of an economy growing at 7-8.5 per cent annually over the last three years:

Almost complete overtaking of the huge arrears of track renewals (almost 22,000 km in 2001), made possible by the massive infusion of additional funds through the Special Railway Safety Fund (SRSF) set up in 2001

A significant improvement in the safety scenario, with accident rate falling from 0.65 /million TKM in 2000-01 to 0.29/million TKM in 2004-05, a reduction of 55 per cent and train derailments reducing from 350 to 138, a reduction of over 60 per cent.

THE REAL TURNAROUND

If "turnaround" means, as it should, the reversal of a trend, then that took place 5-6 years ago around the turn of the millennium, when the ominously reducing gap between income (Gross Traffic Receipts or GTR) and expenditure (Ordinary Working Expenses or OWE) — caused by depressed earnings due to a sluggish economy and a spurt in expenditure consequent to the implementation of the recommendations of the Fifth Pay Commission — started to widen, as may be seen in Figure 2. The main reason for this turnaround was the control over expenditure or OWE. Almost 45-50 per cent of OWE is made up of expenditure on staff, which in turn has two components — expenditure on staff (on roll) and pension payments to retired employees/eligible family members. A further 20-25 per cent consists of expenditure on fuel/energy.

Referring again to Figure 2, it may be noted that there is a pronounced downward shift to the curve of the staff (on roll) costs around the turn of the millennium.

This is due to the `right-sizing' initiative launched in 1999, that bucked the trend of OWE significantly, leading to a reduction in overall expenditure by at least Rs 2000 crore in 2005-06, compared to what it would have been had the staffing levels of 1998-99 been maintained. (The staff on roll has reduced from about 15.8 lakhs in 1998-99 to about 14.2 lakhs by March 2005, down 1.6 lakh or 10 per cent).

In the context of the setting up of the Sixth Pay Commission recently, it is worth remembering that the expenditure on staff and pension payments increased by almost 35 per cent in just one year, between 1996-97 and 1997-98, in the aftermath of the Fifth Pay Commission. There is therefore no room for complacency.

Summing up, what the Railways has witnessed is not a turnaround but a financial "surge" — a development that has understandably generated a sense of euphoria. Amid this pervading sense of well being, there are certain issues that should not be lost sight of:

The EPCC strategy, while no doubt enabling a one-time boost in the earnings, effectively cuts into the design reserves and fatigue life of both the track and the wagons. Accelerated wear and tear of the assets needs to be anticipated and provided for. After all, it was IR's inability to provide adequately for replacement of its overaged assets that necessitated the extra-budgetary support by way of the SRSF in 2001 to complete the huge arrears, particularly of track renewals.

There should be no slackening of the policy of `right-sizing' IR's productivity figures are far below world standards. For example, even after excluding staff in `support' areas such as production units, medical and security departments, the figure for IR is about half the Chinese Railways' (767 billion NTKM+PKM/employee for IR compared to 1452 billion NTKM+PKM/employee for CR), a system of comparable size at present.

Nimble private players with access to vast resources are slated to enter IR's core profitable business, that is freight operations, both directly as operators (container traffic) and as JV partners in the proposed Dedicate Fright Corridors along the `Golden Quadrilateral'. While no doubt the volume of traffic handled will go up substantially, IR's own share of the revenues may not proportionately rise.

That leads to the most crucial and difficult issue — one that has been repeatedly ducked: Organisational restructuring. Will/can IR forever remain a large bureaucracy under the government? Perhaps there is a need to revisit some of the more unpopular recommendations of the much-maligned and quietly-buried Rakesh Mohan Committee Report on the Indian Railways.

(The author is a former Member — Staff — of the Railway Board.)