Railway Revamp: Reform and restructuring is need of the hour

Reform and restructuring is need of the hour

Ever since its inception, Indian Railways (IR) has developed in a complicated way without any focus on the organisation’s viablity, and today, it operates several uneconomic lines. IR’s operations are largely focused on the passenger rail segment. In contrast to other railway systems in the world, there has been little development in the freight segment. The sector is therefore beset by several structural challenges that need to be addressed urgently.

Key challenges faced by IR

Inadequate capacity remains a major roadblock for IR. Today, nearly 12,000 passenger trains run each day, of which 8,000 are major trains. Limited tracks and growing traffic have therefore restricted speed levels. In fact, the speeds of passenger and goods trains have not changed since the nineteenth century.

At present, most stations handle passenger trains of 8-10 coaches against their capacity of handling 24-coach trains. Until the current capacity is augmented, “consolidating” passenger trains to efficiently utilise existing capacity will be vital. Further, the cost of building tracks continues to remain high. It costs nearly Rs 120 million per km to build a new track, while for difficult terrains, the cost can be as high as Rs 250 million per km.

Revenues earned from passenger traffic are also low as passenger fares continue to be cross-subsidised by higher freight fares. For every passenger train that IR runs today, it needs to run half a goods train to make up for the loss. Thus there is heavy dependence on freight traffic for additional revenue. However, the development of the dedicated freight corridor (DFC) is expected to take away nearly 55 per cent of IR’s freight traffic.

Currently, about 95 per cent of IR’s passenger trips are in the unreserved, general category. Therefore, IR cannot afford to ignore this category of passengers. Getting a ticket on time is a major challenge faced by them. In this context, it is even more important for IR to ease capacity constraints, given that the demand for rail travel continues to be high.

Recent investments in road development by the National Highways Authority of India have also threatened IR’s position, as roads are gradually replacing railways as a mode of transport. This has especially threatened IR’s share of business for passengers travelling by rail for distances under 400 km.

Pillars for reforms

The Committee for Mobilisation of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board has identified the following five pillars for reforming the railway sector.

  • Adopting a proper commercial accounting system has been recognised to be vital for greater transparency and information dissemination. The current accounting system is not transparent and fails to provide adequate information to estimate the actual cost per traveller. Commercial accounting is not only important to understand the returns to a private investor but also to understand the rate of return of a railway project.
  • Private entry across all segments of the railways should be encouraged. However, due to capacity constraints, IR cannot offer a guarantee on the arrival time of a train, especially on heavy traffic routes which tend to be more lucrative. This is a major deterrent to private players.
  • The appointment of an independent regulator via the legislative route is also important. The regulator would be responsible for setting tariffs and ensuring that the rules of competition are adhered to.
  •  Over the years, IR has become excessively centralised. Decentralisation of the railways is therefore necessary, from the central level to the regional and zonal levels.
  • The current HR structure needs to be modified to streamline entry on IR’s payroll. Today, entry at the officer level in the railways is through seven different streams, and this tends to be very complex.

Eventually, with the shift to commercial accounting, the railways will be compensated for the true social costs incurred. These include the cost of opening up new uneconomic lines and the cost of subsidising fares of

passengers who truly need the subsidy (and not across the board). Fares would be determined by the proposed rail development authority. Overall, the adoption of these reforms will be important in addressing IR’s structural challenges.

Based on a presentation by Bibek Debroy, Chairman, Committee on Restructuring of Railway Ministry and Railway Board, and Member, NITI Aayog