The railway sector has been abuzz with activity in the past 12-15 months. The Ministry of Railways (MoR) unveiled a new approach towards several long-standing concerns such as the restructuring of Indian Railways (IR). During 2015-16, while freight traffic reported a marginal increase, passenger traffic posted a slump vis-à-vis 2014-15. On a positive note, network expansion and infrastructure modernisation picked up pace. However, the falling share of rail freight in total freight movement is certainly a cause for concern. Industry experts share their views on the sector’s progress, the impact of key initiatives, unresolved issues and the way forward…
How has the railway sector progressed in the past one year?
During the period 2011-12 to 2015-16, overall rail container traffic increased at a compound annual growth rate (CAGR) of 4.6 per cent, driven primarily by the exim segment. In the past two decades, the share of rail in hinterland traffic from inland container depots (ICDs) to ports (and vice versa) increased to about 30 per cent. However, the share declined to about 22 per cent in the past year. Of this, container traffic accounted for a 4.18 per cent share of IR’s freight traffic in 2015-16. This has remained stagnant overall in the past two years. In terms of absolute volumes, rail container traffic stood at 46.18 million tonnes (mt) in 2015-16. The share of exim cargo in total container volumes stood at about 80 per cent, while domestic traffic accounted for the remaining share.
Freight loading stood at 1,107 mt in 2015-16, as compared to 1,095 mt in 2014-15, indicating a growth of 1.1 per cent. Freight earnings stood at Rs 1.11 trillion in 2015-16, a growth of 5.7 per cent over 2014-15. However, IR’s market share in freight transportation in the country compared to roads has fallen steeply to about 30 per cent from approximately 80 per cent in themid-1950s. The present ratio is not a very good sign for India’s economy. The reasons for diversion from rail to road include high freight rates, high and unreliable transit time by rail, and congestion en route and at terminals. Passenger earnings stood at Rs 453.76 billion in 2015-16, growing at a rate of 7.5 per cent over 2014-15.
There have been some significant decisions that have been taken in the past one year. The most important one is the restructuring of the Railway Board. The erstwhile positions of member (mechanical), member (electrical) and member (engineering) have now been changed to member (rolling stock), member (traction) and member (infrastructure) respectively. The portfolio and the responsibilities of the members have thus been changed and this is a step that was long required.
What has been the impact of the key initiatives undertaken by the government?
During the past year, a number of initiatives have been set in motion. Key policies which restricted growth are being reviewed. Port congestion surcharge on imports has been removed but this has had only a marginal impact on traffic. In June 2016, additional rail terminals were allowed for handling domestic container trains. Meanwhile, the Railway Board is expected to permit more commodities to be transported through container trains.
The key initiative taken by the government is to rapidly expand the network to increase the carrying capacity of the system. The central government has decided to spend Rs 8.5 trillion over the next five years to modernise IR for which it have received a 30-year loan from the Life Insurance Corporation (LIC) of India. An MoU was signed between the MoR and LIC for financial assistance of up to Rs 1.5 trillion over the next five years for implementing railway projects. The cabinet also cleared Rs 820 billion for the dedicated freight corridor (DFC) project aimed at decongesting the existing network. In order to expedite capacity augmentation, the MoR has delegated more powers to zonal railways. However, the impact of pouring in huge amounts for capex will only be visible after a couple of years.
The organisational change will have a long-ranging impact on the working of IR. The reporting chain of the four important officer cadres has now changed and this will lead to a positive change in interdepartment coordination.
What are the key challenges being faced by stakeholders?
Container train operators (CTOs) face a number of issues which impact their profitability. In the past 10 years, additional capacity has been created through acquiring rakes and constructing terminals, for both domestic and exim cargo. Thus, overcapacity is now an issue, as there has been a less-than-equal increase in traffic. Also, a substantial increase in rail haulage charges, as against the general rail freight, has severely affected the container business. As a result, the rail haulage structure has been totally altered, with heavy commodities seeing an uneven increase in container haulage by rail. Simultaneously, in this period, diesel prices fell substantially and road tariff in some sectors became cheaper than rail.
CTOs have invested over Rs 50 billion during the past 10 years in infrastructure. Of this, Rs 15 billion was through foreign direct investment (FDI). Most of this investment was in new rakes and container terminals. However, almost all CTOs have been making losses in the past one or two years on the capital invested. Only some of them have made marginal profits. Due to this, CTOs have stopped further investments in capacity creation. Orders for 30 new rakes placed on wagon manufacturers have been cancelled and the construction of new container rail terminals has been put on hold. Moreover, Rs 15 billion of further investment, through FDI, has been frozen.
There is limited availability of reliable contractors with adequate capacity for undertaking large-scale projects. There are already a large number of economically unviable projects. The railway sector also suffers from slow progress of network augmentation, including doubling of congested routes. The land acquisition process is also slow. The Seventh Pay Commission will result in heavy additional payout towards pay and pension, thus further burdening IR. Law and order conditions, too, are critical in various areas such as Chhattisgarh and Jharkhand that are important for coal transportation.
The key challenge that IR is faced with is to absorb the financial impact of the Seventh Pay Commission recommendations. Freight traffic is the main revenue earner for IR. Unfortunately, as per ministry data, during April-May 2016, freight traffic did not increased to the extent expected by the MoR. There is an urgency to come up with innovative ideas to attract freight traffic from road to rail and to increase IR’s non-fare box revenue share. In this context, creating a unit within the Railway Board which focuses solely on non-fare box revenues is a good initiative.
What is the sector outlook for the next one to two years?
After customs clearance, imported cargo is transported by road to the hinterland and the reverse is done for exports. This has led to the setting up of a large number of port-side container freight stations. This is against the policy of the government and has led to congestion at the entry of ports. The government is expected to reverse this trend through policy and other initiatives. Further, the Railway Board is currently reviewing the restrictive list of commodities that should be allowed for container transportation. For instance, scrap material is likely to be opened for containerised transport. This will provide a wider choice for CTOs. The DFC will provide a platform for improved services and faster movement of cargo.
IR is falling short of achieving its targets in freight loading, freight earning and passenger earnings. The addition of tracks (doubling/third line) which is essential for augmentation of carrying capacity is also lagging behind the target, despite an impressive increase in capex in 2015-16. IR’s iconic project – the DFC connecting the Jawaharlal Nehru Port Trust to Delhi and Dankuni to Ludhiana – is also far behind schedule and will take more than two years to complete. In order to resolve these problems, IR has launched an ambitious restructuring of its departments, beginning with the change of designations of the members of the Railway Board and redistribution of work on functional lines, instead of departmental lines. Though it is too early to predict the outcome of these changes, it is expected that the process of reforms will continue even beyond the cosmetic changes and will result in IR regaining its market share.
With more clarity on the goods and services tax regime, there will definitely be a reorganisation of logistics supply chains and IR has an important role to play. With internal organisational reforms and a focused approach on enhancing non-fare box revenues, the MoR is getting geared up to perform well in the next two years. Also, certain stretches of the DFC project will be ready in the next two years and IR will be able to attract more traffic on these choked routes.
“The Railway Board is currently reviewing the restrictive list of commodities that should be allowed for container transportation. This will provide a wider choice for CTOs.”
Kamlesh Gupta, President, Association of Container Train Operators