Railway Budget 2016: Prabhu should open the door to private investors to get Railways back on track

By Sanjeeva Shivesh

The second Railway Budget of Suresh Prabhu was eagerly expected, primarily due to the fact that his first budget was high on promise and by January 2016, we knew that the financial health of railways deteriorated further.

The reformist image of Suresh Prabhu, the plethora of expert committees and release of Achievement Booklet with hashtag #RailYearofChange, further raised expectations of radical moves by the Railway Minister.

Railway Budget 2016: Prabhu should open the door to private investors to get Railways back on track


Indian Railways is one of the largest organizations in the world responsible for commercial activity. It’s long existence, despite years of poor decisions by politicians and top management is an indicator of robustness of the organization. As a prime mover of bulk commodities and passengers across more than 7000 stations, it plays a huge role in India’s economic progress.

However, railways are in a mess. The golden quadrilateral is choking. The punctuality of trains over the years has gone down. 2015-16, saw second consecutive year of decline in passenger volumes. But the scariest data for railways is stagnation of freight volume. For the first time in last 25 years, we find that the freight business, which is the butter of Indian Railways, has grown less than 1%.

Let us put the numbers in perspective. Last year (2014-15), the freight hauled by Indian Railways was 1095 million tonnes. The revised estimates for 2015-16, puts this number at 1107 million tonnes, that is 1% higher than the previous year. A point worth noting is that in the last 15 years, railway loading has increased on average 7% every year. While sluggishness in railway loading can be attributed to subdued economy, the reality is that we have had several years in the past when GDP growth was less than 5%.

So, what is the real reason for stagnating freight volumes? Look at the growth in railway freight rates and you will get the answer. Since the year 2000, the generalized railway freight rates have increased 11%. That means, on a per tonne kilometer basis, the average freight rate to a shipper on Indian Railways was Rs 1.00 in 2011. This has increased to Rs 1.68 now. Comparatively, the long distance freight rate for trucks is Rs 1.75 now. Take into account, factors like last mile bridging costs, better highways and continued overloading of trucks, we know that trucks have become faster, better and cheaper for its customers.

No wonder, the budget refrained from making any further increase in tariff, both on freight and passenger. Any increase in tariff would only hurt the railways. This has happened because, on one hand, India invested in building its highways, it shied away from investing in railways.

Thus, Prabhu’s budget must be reviewed in this context. Certainly, the budgetary 2016 has large elements of direction setting. Prabhu declared the five year vision of making Rs 8,50,000 crore investment in Railways with Rs 121,000 crore coming in 2016-17. He further declared that most of the investment would go towards doubling, electrification and network decongestion to enhance the capacity and network expansion and fewer on populist measures. There are other announcements also to address issues of customer service, cleanliness and safety. Introduction of new train categories like Humsafar( three-tiered AC trains), Tejas (fast trains with speeds ranging up to 130 km per hour), Uday (Double-deckers) and Antyodaya (unreserved superfast trains). Also, full credit to the Minister setting the vision and discipline in a professionally run organization by announcing setting of Railway Board on business lines.

However, for the announcements to succeed in full measure, it has to be supported with adequate resources. Bear in mind that 2016-17 is the Pay Commission year. It affects railway expenditure by Rs 25,000 crore. That means, adds further pressure to railways ability to generate margins. While Prabhu has boldly stated that the operating ratio at the end of 2016-17 shall be 92%, everyone agrees that it is impossible. The best railways to could achieve shall be about 97% (if Dinesh Trivedi, former Railway Minister is to be believed, it is already 117%).

Higher operating ratio implies, lower operating margins, which means, lesser internal surplus of railways. The impact of Pay Commission on railway expenditure carries forward up-to the next five years. This means, in the next five years, railways ability to generate surplus shall be low.

In this context, generating Rs 8.5 lakh crore for investments is a huge challenge. Kudos to Prabhu for making the state run LIC agree to lend Rs 150,000 crore for railway projects over five years at a favorable term. But generating the remaining funds shall be a huge challenge. So far, Indian Railways have depended on IRFC to mobilise external resources to fund rail assets. Seemingly, this route is heading to a serious bottleneck. Already there are murmurs of Indian Railways' IRFC borrowing account heading into a debt trap. That is Railways borrowing from IRFC to repay IRFC!

Indian Railways ability to mobilise private capital has been very poor to say the least. Unless, Railways create an atmosphere to attract private capital by simplifying its PPP contracts and creating a non-competitive environment for the private player, PPPs will remain non-starter for railways. However, it has achieved some success in Public-Public Partnership, by signing MoUs with Chattisgarh, Jharkhand and other states. But, if Railways are serious, they have to open their doors up to private sector and cooperate with their strategic partners to create railway capacity. Only then it can be brought back to track. Suresh Prabhu recognises this. Therefore, he made it a point that this gets mentioned in his Budget Speech. But how much of this will happen on ground, we will get to know only in hindsight.

Further, the slow pace of development of Dedicated Freight Corridors must be questioned. The project initially announced by Laloo Prasad Yadav, slated to complete in five to seven years is already into its tenth year and we will not get to see the DFC until 2020.

Prabhu carries the image of a reformer. But that felt short, when simpler targets were set for increasing revenue from non-transport mechanisms like exploitation of railway land and monetizing advertising revenues. Non fare box revenue should be accorded a very high priority on an urgent basis, because that’s only way for Indian Railways to achieve revenue nirvana.

Sanjeeva Shivesh is the Founder and Chief Executive Officer of The Entrepreneurship School, India’s first dedicated school of entrepreneurship based in Gurgaon.

Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to Firstpost.com/Whatsapp and hit the Subscribe button.

Updated Date: Feb 28, 2016 13:20:05 IST

Also See