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Railways: On Path to Permanent Recovery?

The railway budget for 2007-08 reflects a certain determination to continue the restructuring and reform processes. However, the long-term success of the railways' strategy depends very much on additions to capacity being made in the medium term.


Railways: On Path to Permanent Recovery?

The railway budget for 2007-08 reflects a certain determination to continue the restructuring and reform processes. However, the long-term success of the railways’ strategy depends very much on additions to capacity being made in the

medium term.


early a decade ago, a meeting was organised under the auspices of the European conference of ministers of transport on a rather provocative theme – “Why do we need the railways?”. This set in motion a debate that has been raging in academic as well as policy circles on the usefulness of attempts to revive the railways in many countries, especially the developed ones, where railway systems are staging a comeback after having been in the doldrums for a long time.

Besides standard arguments in terms of environmental and efficiency considerations (by way of energy usage), the emphasis has been on much lower cost movements by rail especially over long distances, which even today are being handled by the more expensive road mode despite the possibility of a level of rail service that is more or less equivalent to that provided by road transport. These arguments are being contested but the fact remains that there is a move, though a slow one, towards the railways both in terms of passenger and freight movement. This debate assumes a lot of significance, especially in the context of a developing country like India where the railway mode, over a period of three to four decades, has lost traffic (even a lot of bulk) to the highways due to the sheer inefficiency of operations and failure to introduce systemic changes at the right time. However, the situation seems to be changing, rather rapidly and surprisingly, as a result of efforts by someone who has often been criticised of having put his state way behind other states when he was in charge. Obviously, this organisation is a different cup of tea.

State of Railways

Laloo Prasad’s first two attempts (railway budgets of 2004 and 2005) were mere routine efforts to enable the organisation to stay in place without sliding further down the ladder. But the two subsequent efforts revealed a certain seriousness and focus. Obviously, the minister took some time to understand the issues and he appears to have done so wonderfully well. And what was there to be understood really? That the railways are a commercial organisation with a social orientation and need to be handled accordingly. Traditionally, railway systems all over the world have followed a commercial orientation in their outlook by using their monopoly status to extract what is known in economic parlance as “consumer surplus”, especially from categories of movements from which they could do so. This resulted in extensive cross-subsidisation between categories of freight movements, between freight and passengers and to a very small extent, between different passenger movements. With intense competition from roads, the bread and butter of the railways – namely, high-value items – shifted to roads because of the latter’s superior quality of services, with the railways holding on to loss-making bulk, low-value items. Some restructuring of rates on bulk items and efficiency initiatives enabled many systems to retain some bulk traffic, especially of very low-value items. However, in the Indian context, continued inefficient operations and increases in freight rates have resulted in a fairly steep decline in rail share over the past three decades or so. A recent study [Deloitte 2003] observed that the share of road in total freight movement has been increasing over the past three decades – the share estimated to have increased from 34.5 per cent in 1970-71 to around 63 per cent in 2001-02. During the period 1991-92 to 1998-99, road freight is supposed to have grown at a compound annual rate of 11.9 per cent while rail movement grew only at about 1.5 per cent. However, in the past few years, the shift to road transport has been slower with road share having only gradually increased from 59 per cent in 1995-96 to 63 per cent in 2001-02 indicating a slowdown in the growth of road transport’s market share. However, it is expected that road transport share would go up, albeit gradually, to stabilise around 85 per cent. At a time when developed countries are attempting to revive their railways systems, it appeared to be very clear that in our country we were attempting to wind up the system.

A number of committees (including the most recent expert group headed by Rakesh Mohan, the NCAER 2001 report) suggested radical but useful changes that were required to be made if we want to retain the services of a cheap mode of movement. Following past practices, these recommendations were completely ignored due to pressures from within and outside. However, it does appear to some of us that a section of those within read the message on the wall and ever since then have been attempting to introduce some restructuring so as to enable the railways to focus on their core activity – the movement of people and freight. All this was being done, in a manner of saying, almost surreptitiously till the arrival of the present minister who slowly got down to business in a more serious way.

Towards the late 1970s and early 1980s when railway performance was dithering after some improvement during the mid1970s, a number of analytical studies [Sriraman 1981; Rao and Sriraman 1985; Sriraman 1988] emphasised the need to enhance efficiency of system operations so as to enable the system to be viable and vibrant enough to take care of expanding requirements. All along (even later), the

Economic and Political Weekly March 10, 2007

organisation showed a surplus without really attempting to adequately provide for various items such as depreciation, etc. This was corrected to some extent by the late 1980s after warnings given by the Railway Reforms Committee [GoI 1983]. But by then the accumulation in terms of various renewal needs had become so high that it has never been possible to completely wipe out the arrears. This problem remains a major one even now with attending implications for safety though the emergence of the railway safety fund (based on a fairly good flow from highway levies) has reduced its magnitude to some extent.

Though investments were being made with a view to improve operations thereby enhancing revenue, the effects were not widespread. For example, the turnaround time of the average wagon improved substantially (falling from 11.5 days to nearly 6.7 days on the broad gauge between 1990-91 and 2003-04), and other parameters which are important such as track utilisation (gross tonne km per route km), wagon utilisation (net tonne km per tonne of wagon capacity) have gone up marginally. In the case of other parameters such as the average speed of trains, average freight train loads, ratio of empty to loaded movements, there have been hardly any improvements. While this reflected to some extent the saturation of line capacities thereby limiting speeds, it is not quite clear why there were no attempts to increase average loads, a practice that has been initiated during the last two years resulting in a good degree of success. There could have been some investment associated with this but the message that there was still a lot of potential that needed to be tapped was taken seriously only during the last two years or so. Obviously, it was no mere reading. An implementation plan was initiated to make sure that results would accrue.

Railway Budget 2007-08

The railway budget for 2007-08 [GoI 2007] reflects a certain determination to continue the restructuring and reforming processes. There are still elements of a framework of action that is keen on tapping all the existing potential with a view to reducing unit costs to bring down the operating ratio still further. A serious attempt is being made to reduce empty wagon movement. But what can be overlooked is the possibility of trade-offs between revenue gains from such reductions as against losses in the absence of effective coordination between decisionmakers at the ground level. With the freight operations information system not yet operational on a systemwide basis, the possibilities of using empty flows can be severely limited. Though the door has been open for the private sector to organise the movement of containers on the railways, questions have been raised regarding the ability of the railways to provide the level of service that is expected and which can really provide the basis for a diversion of container traffic (mostly exports and imports) back to the railways. The decision to give parcel movement a greater commercial orientation does seem to have paid off with trucking firms in this business already getting worried about the huge margins (associated with these movements) that they may have to forgo. Customer orientation that is being adopted in a significant way, perhaps for the first time, would go a long way not only in retaining traffic but also in helping diversion back to the railways.

In the context of passenger traffic, it can be argued that the decision to cut fares may not be the right move to undertake at this stage given the inelasticity associated with long-distance movement by second class. Though competition from airlines (for longdistance movement) and roads (mediumand short-distance movement) is a reality now, it is to be emphasised what the Rakesh Mohan Committee [NCAER 2001] pointed out in terms of the railways still being the preferred mode for certain sections of the population who would be ready to patronise the railways but on the condition of a better quality of service. Passenger facilities are being improved and it is quite likely that the fares would go up when these are in place. An excellent case of a strategy that is responsive to customer needs first is what is being apparently tried out. In this context, it is necessary to point out here that the budget explicitly acknowledges the need to understand user needs and has provided allocations for market surveys, something that should have been done a long time ago.

What is not explicitly stated (though may be recognised within the organisation) is the medium-term sustainability of success achieved so far in the face of increasing limitations on capacities on the network. There are, of course, plans laid out for the expansion of relevant capacities which are expected to be fully in place in a period of five years. These relate to separate freight corridors on congested routes, inter-city passenger corridors to provide for heavier flows, more effective connections to ports to handle trade volumes, etc. With more passenger services being offered within the immediate future and the need to ensure quantity as well as quality of services, there is bound to be intense pressure on the system. There is obviously a need for coordination at all levels to ensure that short-term as well as long-term plans fructify at the right time so that the system can withstand these pressures and emerge from this phase and get on to a path of recovery on a long-term basis. The message is clear at the top echelons of the administration but it needs to percolate downwards to the field. Only this can ensure the well-being of the organisation which constitutes a lifeline of the nation.




Deloitte (2003): ‘Modernisation of the Trucking Industry’, report submitted to the advisory group on trucking industry in India, All India Motor Transport Congress and All India Confederation of Goods Vehicles Owners’ Association.

GoI (1983):‘Report of the Railway Reforms Committee’, Ministry of Railways (Railway Board), Government of India.

– (2007): ‘Introducing the Railway Budget for 2007-08, Parts I and II’, Railway Budget Papers, Ministry of Railways (Railway Board), Government of India.

NCAER (2001): ‘The Indian Railways Report: Policy Imperatives for Reinvention and Growth’, National Council of Applied Economic Research, New Delhi.

Rao, T V S and S Sriraman (1985): Disequilibrium in Rail Freight Services, Ajantha Publications, New Delhi.

Sriraman, S (1981): ‘Length of Haul in Rail Freight Movements’, unpublished PhD thesis submitted to IIT, Kanpur.

– (1988): ‘Empty Wagon Movement in India: A Preliminary Findings’, Artha Vijnana, Vol 30, No 1, pp 1-54.

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Economic and Political Weekly March 10, 2007

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