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Turnaround Story of the Indian Railways

Turnaround Story of the Indian Railways

 makes more sense to those who are familiar with this historiographical area

BOOK REVIEW

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Turnaround Story of the Indian Railways

S Sriraman

T
he Indian railways, as an organisation, has been the subject matter of study by numerous authors and high-level committees which have examined the different dimensions of the problems and challenges faced by the organisation in an objective way. The book under review, which narrates the story of the organisation’s recent turnaround cannot claim this, since its very basis is the premise that there was a political mandate given by the people to the minister to take the organisation forward the way he finally did. One need not take this seriously since national political mandates are not given merely to take an organisation forward even if it is the Indian railways. One wishes that such a political twist need not have been given to some good work that was done in the railways. It must be recognised, however, that the process of reform in the railways (elements of which were already in place since the late 1990s) was finally in place in full force, with the benefits accruing over a period of time.

The narration begins with an anecdote involving the minister and people in his constituency relating to reduction of fares for the ordinary passenger. While such a reduction makes a difference to the rural passenger (non-suburban), what is overlooked is its deleterious impact on the suburban travellers (who constitute nearly 70% of the ordinary passenger traffic) by making travelling conditions more difficult as a result of increased passenger

Economic & Political Weekly

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november 28, 2009

Bankruptcy to Billions: How the Indian Railways Transformed by S Kumar and S Mehrotra (New Delhi: Oxford University Press), 2009; pp xv + 207, Rs 495.

movements. The first chapter provides a bird’s-eye view of the strategy pursued in implementing the reform process. Such a strategy, based on consensus building at all levels of the organisation paid off dividends, with ideas that were in place for decades being put into action in a nonpolitical way (without any interference from political quarters including the minister). We now turn to the political economy aspects of the reforms that are elaborated in the second chapter.

Decades of Crisis

After a brief attempt to trace the evolution of the railways in India, the authors directly begin their discussion with the 1980s, when according to them, there was an operational crisis especially in regard to freight movement. This basically arose because of the heterogeneous nature of the wagon stock in terms of both the age of the stock and its capability, which only permitted limited speeds. In addition, the adoption of the practice of accepting wagon loads along with train loads created operational inefficiencies. Given this background, the entire railway system was reduced to operating on the strength of the weakest link. This was not the first instance of such an occurrence. Sriraman (1981) and Rao and Sriraman (1985) pointed

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out that this has been the major problem in the Indian railways since the late 1960s wherein additions to the wagon stock, upgradation of the track capacity, etc, hardly took place due to low investment priorities. This placed such a heavy burden on the system that a good part of the require

ments were not being met by the railway system. It was at this point of time that the diversion to the highways began even for bulk items because of the sheer inability of the railways to lift the tonnage. This trend has continued and today, highways dominate the freight movement scenario in the country. While the railway management maintained all along that the overall shortage of wagon stock was the primary reason for the inadequate allocation to specific commodity groups, Rao and Sriraman (1985a) maintained that there was no evidence that railways were constrained by capacity limitations in their operating policies. In the mid-1980s, the dawn of the Gujral era saw some transformation in terms of heavier train loads and faster movement with an emphasis on train load movement. The authors claim that the present revival was built on the Gujral plan which was almost totally sidelined soon after (except for the decision to have the train load as a unit of movement) since the risks associated with the continued implementation of the plan got emphasised much more than the benefits that were expected to accrue. The financial crisis that followed in the 1990s is then taken up for discussion.

According to the authors, a range of internal and external factors led to the crisis. It is admitted and rightly so that investment activity picked up substantially and a lot of capacity additions took place. All this materialised over a period of time as a result of the recommendations of

BOOK REVIEW

some high level committees including the Railway Reform Committee (1983). All this is not explicitly stated, but it is emphasised, as in past studies, that efficient utilisation did not take place thereby leading to no tangible improvements in physical productivity. The use of capacity for train load movements in a substantial way carried the system forward in terms of its physical parameters to an extent but since such a strategy helped move largely the low value bulk material and gave no real surpluses, a financial crisis was bound to happen. This point is also missed out.

Misplaced Criticism

The recommendations of the Rakesh Mohan Committee (NCAER 2001) come under severe and unwanted criticism. The committee had recommended, among other things, corporatisation which was apparently rejected at all levels in the railway hierarchy for fear of political repercussions. From all accounts, it is to be noted that the Rakesh Mohan Committee never really talked of privatisation especially of core activities and which meant a greater commercial orientation of railway operations which is what the authors emphasise throughout the book. What is more perplexing is the statement in the book that all these recommendations were conventional and were antithetical to Lalu’s populism approach. The issue is whether an organisation could forever be run on this approach. The recommendations are decried in the sense of being textbookish by their very nature. The authors need to take note of the fact that the theories textbooks spell out or explain are based on practical observations/ empirical evidence, on the basis of which hypothesis are put forward and tested in a larger context. From what follows in the rest of the chapter in terms of crafting the space for reforms and implementing them, one is puzzled at the need to term this approach “populist” when it could have been easily termed as a “down to earth” strategy.

The authors, in fact, have not done justice to the reformist elements in Lalu by focusing too much on the populism aspect. The fact that he kept his hands off the day to day working of the reform strategy is in itself reflective of this. The reform strategy that was adopted could be termed as containing elements of the “top down” and “bottom up” approaches with each level of the railway hierarchy given the incentive and possibly the accountability at a particular level.

It is heartening to note that serious attempts were made to segregate different streams of traffic on the basis of their importance, their sensitivity to rates/tariffs, etc. Such a disaggregation made it possible to identify some of the politically sensitive segments and enabled the organisation to pursue its reform strategies in the other segments. This was clearly a master stroke based on old ideas (Sriraman 2000) but one that should have been delivered long back. The trouble is that even until very recently the railway authorities were under the impression that they were running a monopoly. While this is still theoretically true in terms of the Indian railways being the only organisation allowed to run services, at the ground level, road transport had long back captured most of the high value traffic and has been increasing its market share steadily. This forms the subject matter of the third chapter which we now turn to.

The market for transport services is a derived one in terms of the demand for services. The response to changes in tari ffs is dependent on the response to changes in the final demand. These responses vary widely depending on the value of the good, in case of freight. These complex features have been incorporated traditionally into the tariff structures of railways the world over on the assumption that the railways were a monopoly. While conditions changed, the railways continued their old methods of tariff fixation as a result of which the highway became the dominant mode in many countries including India. This is dealt with in greater detail in the fourth chapter. However, some of the interpretations are mistaken. The railways always had an edge over roads even for short distances such as 100 kms for low value bulk material; and even in the face of poor service levels, this commodity moved by rail except when tonnages could not be lifted in which case there was no other alternative but the road. In the case of steel which has always been characterised as bulk but high valued (as a manufactured item), the road became the preferred mode due to the door to door service provided. Over a period of time, the railways increased tariffs for high valued items to such an extent that these, which had earlier provided the surpluses became only marginal revenue earners. On the other hand, commodities which were most suited to railway movement and formed bulk of the movement have been continuously undercharged.

On the passenger front, the authors are not quite right in saying that “99% of the passenger business is politically sensitive” (p 71). In fact, it has been observed quite frequently in the past that a significant

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portion of the passenger segment which consists of long distance non-suburban traffic and short distance suburban traffic is not really sensitive to fare increases. The main consideration on the part of the passenger in these segments is that fare increases need to be followed by better service levels. Any suburban passenger in Mumbai, for example, would obviously expect such a response on the part of the railways but this is something that the railways have never been able to fulfil. It is correctly said that there are several opportunities to increase earnings. But the attempt to compare the potential earning of a coach with the cost of operation is too simplistic a way of looking at the issue.

What ought to have been done was to compare the actual earnings with the costs. This would indicate the real potential in the different travel class segments. It is quite in tune with conventional wisdom to state that untapped potential really lies in the air-conditioned travel segment but it is too much to say that the entire 150 million sleeper class passenger reflects this potential on the condition that fares are affordable. Does that imply bringing down airconditioned fares to a little more than sleeper class fares? If that is so, huge numbers would be required to bring down costs which, in any case, would take a turn once diseconomies begin to set in. With long distance road passenger movement expected to increase, huge numbers on the railways may be only a dream. When dealing with costs, the authors bring out the fact that the railways have a very high percentage of fixed costs and that this aspect needs to be kept in mind all the time to encourage larger output so as to result in lower fixed costs.

This is the key to the turnaround story. A fuller utilisation of the existing capacity in terms of the various dimensions such as heavier loads, longer and faster trains, etc, provided the basis for the reduction in unit costs, the surpluses that resulted even though revenue increases were much more moderate. In Lalu’s words, the cow was being properly milked. This process is discussed in some detail in the fourth chapter. The essence of the details given in this chapter, many of which have already been discussed, reflects the emphasis of the reform strategy on

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augmentation of capacity by improving productivity by tapping the existing untapped potential significantly.

Competition and Reform Strategy

Traditionally, the railways, not only in India but all over the world, have hardly had an effective demand strategy especially in the face of strong competition from road transport. Though there were personnel who were appointed from time to time at various levels to monitor and market rail services, until recently, such a need was not taken seriously. But the past decade saw an awareness of this need, and steps were initiated to devise marketing strategies to retrieve traffic from the roads. With a crisis at hand, it was obviously necessary to consolidate and strengthen efforts. In particular, serious attempts to woo parcel traffic onto scheduled express and mail trains paid dividend with this category of traffic growing at significant rates. Rationalisation of tariffs also enabled the railways to make the rate structure simpler while at the same time enabling low value bulk traffic to be classified into higher classes thereby earning greater revenue.

The idea of using empty flows usefully and commercially is not a new one, one that was scoffed at during the 1980s when the author of the current review came out with an outline of such a proposal (Sriraman 1988). This formed a part of the reform strategy and had some success. The focus on the customer – in the passenger and the freight segments – in terms of innovations like the Garib Rath trains, introduction of private participation in the container movement thereby breaking the monopoly of the Container Corporation of India (CONCOR), a variety of new customer-friendly services in both segments – has definitely raised the level of the quality and quantity of services. This is brought out well in the fifth chapter. The reform team surely needs to be complimented for their work in revitalising the demand aspect of railway services in India – one that did not even receive lip service in the past.

In the final chapter, the authors attempt answers to these questions: (a) whether the growth of the railways in the past five years or so is sustainable? (b) can the experience be replicated elsewhere in the country? It is obvious that they would talk

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in terms of certain basic conditions that need to be satisfied on a continuing basis for sustainability. Given that some success stories could not be sustained, there is a danger of the organisation going back into a shell and involving itself in more “in the box” rather than “out of the box” thinking. It is here that the user of the system has a role to play in terms of pressure groups. The authors should have explicitly indicated this rather than trying to place the issue in the political arena. Moreover, they place too much reliance on the railways to do the fine balancing between commercial and social obligations. As a huge country that is yet to be effectively connected to the railway mainstream network, the central government has a significant role in providing support for social obligations. This is especially so once saturation of capacities takes place. This will allow very little leverage for cross-subsidisation. As for the replication aspect, one tends to agree with their view that the strategy involved is necessarily to be formulated in terms of a multi-pronged one. Bits and pieces of reform will not work anywhere even in a small organisation, let alone something as huge as the Indian railways.

To conclude, the story of the railway turnaround has been reasonably well documented, but the fact that the reform strategy adopted was based on old ideas is nowhere brought out. All the same, the book is useful reading especially for policymakers, and for those interested in the survival of the railways and other public utilities.

S Sriraman (sriraman@economics.mu.ac.in) is with the Department of Economics, University of Mumbai.

References

NCAER (2001): “The Indian Railway Report” (New Delhi: National Council of Applied Economic Research).

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

– (1985a): “Efficiency of Railway Transportation: The Indian Experience” in K Button and D E Pitfield (ed.), International Railway Economics (England: Gower Publishing).

Sriraman, S (1981): “Length of Haul in Rail Freight Movements”, unpublished PhD thesis submitted to the Indian Institute of Technology, Kanpur.

  • (1988): “Empty Wagon Movement in India: A Preliminary Study”, Artha Vijnana, Vol XXX, No 1, pp 1-54.
  • (2000): “Indian Railway Finances: Critical Issues and Emerging Options”, Economic & Political Weekly, Vol XXXV, No 12, 18 March.
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