Overview

Government’s initiatives aim to drive growth

Indian Railways (IR) is often described as the backbone of the country’s transport system. It is not only instrumental in facilitating long-haul bulk freight movement and long-distance passenger traffic, but also provides mass transit in suburban areas of metropolitan cities. Spread over a route length of over 66,030 km, IR currently has the world’s fourth largest rail network after the US, Russia and China.

IR transports passegers close to the equivalent of the world’s population every year. It carried over 1.1 billion tonnes of freight in 2015-16 and is the fourth member of the select billion tonne club after the US, China and Russia. IR currently handles about 30 per cent of the country’s total freight traffic and 20-25 per cent of the passenger traffic. It runs 21,000 passenger and freight trains carrying over 23 million passengers per day connecting about 8,500 stations. Further, of IR’s trains, 65 per cent carry passengers, yielding less than 30 per cent of revenue; while 35 per cent are freight trains, yielding about 65 per cent of total revenue.

Meanwhile, IR is one of the main modes of transport for dry bulk commodities and its freight movement is dominated by nine of them. Of these, four commodities – coal, iron ore, cement and foodgrains – accounted for about three-fourths of IR’s freight traffic in 2014-15. Coal contributed the maximum share (41.6 per cent) during 2014-15, followed by cement (9 per cent), foodgrains (8.5 per cent), iron ore (8.2

per cent), and container services (5 per cent).

Key trends

Between 2011-12 and 2015-16, freight traffic showed an upward trend. It increased at a compound annual growth rate (CAGR) of 3.3 per cent, while freight earnings increased at a CAGR of 12.2 per cent during 2011-16.

Despite the decline in passenger traffic from 8,306 million in 2011-12 to 8,152 million in 2015-16, passenger earnings increased at a CAGR of about 12 per cent during the same period. This is primarily because of increase in passenger tariffs. Within the passenger segment, suburban traffic stood at 4,459.38 million passengers during 2015-16 as compared to 4,383.18 million in 2011-12. Meanwhile, non-suburban traffic declined to 3,692.52 million during 2015-16 against 3,922.99 million during 2011-12.

The pace of fixed asset creation as well as rolling stock acquisition has picked up in the past two years. For instance, IR managed to electrify 1,375 km route length during 2014-15 as compared to the target of 1,300 km. IR aimed to complete 1,600 km of electrification work during 2015-16, of which work on 618 km was completed during April-October 2015. Further, IR acquired 11,151 wagons during 2014-15 as against the target of 10,000 wagons. During 2016-17, IR is to acquire about 12,000 wagons. Similar trends have been witnessed in terms of track renewals, the construction of new lines, gauge conversion, as well as the acquisition of locomotives and coaches.

Investment opportunities

The Ministry of Railways (MoR) has estimated an investment requirement of about Rs 8.56 trillion till 2020, which will largely be spent on decongesting its network. About 84 per cent of the expected investment will be diverted towards network decongestion and expansion, rolling stock acquisition and logistics park development. It is estimated that budgetary sources and market borrowing will be the key sources of funding, together accounting for about 60 per cent, to meet this huge investment requirement. Other sources of funding include internal generation, state joint ventures (JVs) and private participation.

Going forward, the MoR plans to mobilise funds from the Life Insurance Corporation of India and the issuance of infrastructure bonds by the Indian Railway Finance Corporation, as well as setting up a development fund with assistance from multilateral institutions like the World Bank to meet the investment targets. Besides, the MoR is also exploring new avenues of revenue like monetising land and buildings through commercial exploitation of vacant land and space rights over station buildings, land along tracks, and soft assets such as data, software, etc. Meanwhile, the MoR is continuously exploring ways to reduce energy bills. It aims to achieve annualised savings of Rs 30 billion in the next financial year itself.

Issues and challenges

One of the primary issues faced by IR is the loss of market share, primarily to the road transport segment. The share of IR in freight transport has declined alarmingly to about 30 per cent from a high of almost 90 per cent in 1950-51. One of the reasons for this falling market share has been the tendency of the government to take the politically expedient option of raising freight tariffs rather than passenger fares, to meet increased costs, leading to the overpricing of freight. To win back its share of freight traffic, IR has to be more sensitive regarding tariff revision so as to compete with other modes of transport.

Further, congestion and low carrying capacity are major challenges. The Golden Quadrilateral and the diagonals connecting the four major metro cities constitute less than 18 per cent of route network, but account for 56 per cent of passenger and freight traffic. Freight trains currently receive the lowest priority, though with the upcoming dedicated freight corridors (DFCs) this scenario is expected to change.

In addition, of the 1,219 rail sections on the high density network, 492 are running at a line capacity of over 100 per cent and 228 sections at 80-100 per cent. Meanwhile, 65 per cent of the sections on IR’s high density network are saturated. As a result, the average speed of freight trains remained low at around 25-26 km per hour during 2009-15.

IR’s stressed financial position is another key issue. Although the operating ratio has been declining, it was still at 92 per cent during 2014-15. Further, the operating ratio target of 88.5 per cent set last year remained unachieved. The revised estimate has now been pegged at 90 per cent. However, IR targets an operating ratio of 92 per cent for 2016-17.

Other issues that have resulted in the slow pace of growth and need to be resolved at the earliest include poor private sector participation, the lack of a commercial accounting system, high freight tariffs as compared to other countries, and the slow pace of project execution.

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The way forward

The railway sector is poised to achieve a high growth rate in the coming years. The timely commissioning of the DFCs and meeting targets of expansion works will play a crucial role. The MoR needs to focus on private participation, cost reduction and efficiency improvement to achieve this higher growth rate. However, the recommendations of the Seventh Pay Commission will continue to pose a major challenge for the MoR in meeting its financial obligations.

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