The Hindu Business Line : Cheer the inflation buster

Mr Lalu Prasad has lifted the Railways from ‘fatal bankruptcy’ to ‘natal buoyancy’. His management offers an internally viable solution that busts inflation. The Railways is now a bonny toddler that is planning for a happy childhood and a prosperous adolescence. Adulthood seems far away, says G. RAMACHANDRAN.

The Railway Minister, Mr Lalu Prasad, has demonstrated managerial proficiency of the highest class.

It is very difficult to believe that the Indian Railways was given up for dead seven years ago. The Report of the Expert Group on the Indian Railways had solemnly forecast ‘fatal bankruptcy’. The operational efficiency of the Railways was so horrendous that the report said the Indian Railways was in a ‘terminal debt trap’.

None of the two forecasts — warnings, if you will — of the Expert Group has turned out to be right. Fudged data and erroneous methods cannot be blamed for the forecast error. Surely, the Indian Railways was derailing itself and digging into trouble. The forecasts went wrong for two reasons. First, the learned members of the group spoke their minds fearlessly. Second, Mr Lalu Prasad, the Railway Minister since 2004, took serious note of the sombre forecasts. He then acted with determination.

Mr Prasad dived to the bottom of the problem. He came up with one coherent policy. Outrun the forecasts. He had to raise total revenues without incurring incremental costs. More trains, more passengers, lower fares, more conveniences and more revenues followed. More wagons ran; they ran faster and more frequently. More haulage and more freight revenues followed. Mr Prasad has demonstrated managerial proficiency of the highest class — not second class, not first class but the highest class.

Sinister saboteurs

He has also cut revenue leakages with a sharp sickle. He hammered those that had been short-changing the Railways by under-weighing consignments. He sat on the platform at Danapur station on August 16, 2004 and found out how employees of the Indian Railways had systematically colluded with consignees and transporters to deprive it of its revenues.

Earlier in the week he had dealt firmly with over 500 latecomers at New Delhi’s Rail Bhavan. He turned them away and cut a day’s salary. Mr Prasad understood that the losses of the Indian Railways had internal causes. The fatal bankruptcy and the terminal debt trap would have been insidious inside jobs if they had adhered to the forecasts. Hence, outrunning the two forecasts had to be inside jobs. He derailed the internal causes of the losses. He torpedoed the sinister saboteurs within the system. The master has been succeeding at work since 2004.

Natal buoyancy

Mr Prasad’s determination has paid off. Net revenues have risen over the last four years. The Indian Railways will earn a cash surplus of over Rs 25,000 crore in 2007-08. It had a cash balance of merely Rs 360 crore when the gloomy but honest report was published in 2001. What a turnaround!

Mr Prasad has lifted the Railways from ‘fatal bankruptcy’ to ‘natal buoyancy’. The Indian Railways is now a bonny toddler that is planning for a happy childhood and a prosperous adolescence. Adulthood seems far away. But it would not be gawky and grimy.

The Indian Railways does not any longer look like an old and senile adult without teeth and senses. The truth is that it had indeed lost most of its charm and cheer by 2001. The mere payment of salaries to its army of employees had become a challenge. The probability of layoffs and retrenchment had looked high.

From bust to boom

Mr Prasad has triggered a boom around the Railways. Dedicated freight tracks, warehouses, freight-handling investments, retailing and value-added services will be rolled out. There will be more passenger trains, more comforts, lower fares and more revenues. There will be a boom in information technology services. There will be more buses, taxis and autorickshaws running in and out of railway stations. There will be a boom in employment.

There would be many who will want to work within this matrix of dignified livelihoods and dynamic incomes. And they will be wanted too because it is probable that there will be more jobs on offer than those seeking jobs. Residents of Guwahati will be welcomed by those in Patna. Residents of Solapur will be served by railway employees having families in Gorakhpur. What a turnaround!

Busting inflation

Global prices of commodities have risen by an annual rate of over 19 per cent in US dollars since 2000. It has not helped that fuel prices rose wildly during this period. The Indian Railways had all the justification to push passenger fares and freight rates. But Mr Prasad thought it would be both unfair and unimaginative to pass on costs to passengers, consignees and consignors.

It would have been a passive and daft option. He wanted to bust inflation instead of layering it and reinforcing it. For example, railway freight enters the cost sheets of a very wide range of produce and commodities. If freight rates were pushed up, wholesale and retail prices of these would go up, and as a result of exercising a dumb and daft option.

Mr Prasad chose the smart option. And, this deserves careful scrutiny, applause and emulation. The Railways look like it is all fixed steel, steel boxes, steel coaches and flowing fuel. When steel prices and energy costs go up, raising fares and freight rats seems both necessary and normal. Mr Prasad’s team comprising members of the Railway Board and the general and other managers at the zones and divisions have thought differently. They have thought raising fares and freight rates is both unnecessary and abnormal.

They thought it is dysfunctional too. It had been their experience that raising fares and freight rates drove away customers and revenues. For example, years of rising freight rates had pushed cargo away from wagons and rails and on to trucks and roads. It did not help that the Railways could not offer even the minimum standards of service. It did not help either that road freight cost more. Indian Railways lost, and consignees too lost.

Truck operators gained handsomely. Yet, net-net, it was a big, big loss. Inflation got layered and reinforced.

Not populistic

So, Mr Prasad’s team thought beyond steel, boxes, coaches and energy. They had to. They were terrified of the high fixed costs that these imposed on the Railways. They also analysed the impact of variable costs on profitability. They realised that the solution to the high fixed costs lay in higher utilisation of physical assets — boxes, coaches, tracks, platforms and yards.

They became more convinced of the impact of higher asset utilisation. Its impact on revenues, contribution, profit and cash residuals was very big. Better human capital management and operating systems were its two critical determinants.

They had low incremental costs. But they could trigger big jumps in revenues and bigger jumps in net revenues. Mr Prasad’s team worked on focusing and polishing the human capital and the operating systems within the Railways. They also chose lower fares and freight rates.

When asset utilisation, customer acceptance and consumer satisfaction rise, traffic rises handsomely. Total revenues rise even though unit fares and freight are lower. Therefore, it is difficult to see how the lowering of fares and freight rates is populistic.

Case for emulation

Physical, technological and intellectual assets do not produce revenues on their own. People produce revenues by operating these assets. When people remain inactive, indifferent or disengaged, these assets do not produce big revenues. But costs continue to tick upwards. Every sector in India — including government and the information technology sector — faces the same managerial problem.

The Government has for long chosen to impose newer taxes and higher rates for older taxes to solve its problem. The information technology sector has for long lobbied for and got a weaker rupee, a weakening rupee and tax breaks to solve its problem. Both solutions have imposed very big costs on those outside these sectors. Both government and India’s much-lauded information technology sector have systematically layered and reinforced inflation. But Mr Prasad’s management of the Indian Railways offers an internally viable solution that busts inflation.

(The author is a financial analyst. Feedback may be sent to indiagrow@yahoo.com and pari@thehindu.co.in)