On the Right Track

Trends and developments in the railway sector

The railway sector has received a lot of attention in the past couple of years. There has been a surge in activity in terms of the launch of big-ticket programmes and schemes, introduction of a number of digital solutions and an increase in project uptake. Station redevelopment and modernisation works are in full swing. Work on India’s first high speed rail (HSR) corridor, the Mumbai-Ahmedabad HSR, is currently under way and several stretches of the upcoming western and eastern dedicated freight corridors (DFCs) have been commissioned. Initiatives are also being taken to achieve 100 per cent network electrification by 2022. Besides, passenger safety and comfort is being accorded the highest priority with the provision of new technologies, systems and amenities. Indian Railways (IR) is also taking a number of initiatives to improve the share of revenue from the freight business.

Undoubtedly, many noteworthy measures have been taken. However, much remains to be done. The sector is still mired in political uncertainty, which hampers the business model, thereby affecting service delivery and financial health. A huge backlog of projects is a testimony to this fact. Thus, before moving forward, key issues such as procedural delays and financial instability warrant immediate attention from policymakers. While government’s vision is aimed at involving private players in the sector, it must be noted that this will happen only if the ground is set. Besides, policy execution will be equally important. Only then will the policy initiatives hold meaning for the national transporter.

Performance of IR’s freight and passenger business: Analysis of traffic and earnings

IR’s freight segment has been a profit-making business, accounting for almost three-fourths of total railway earnings. However, the railways’ share in total freight traffic in the country is only about 31 per cent, with the sector losing out to the road sector. From 2013-14 to 2017-18, freight earnings grew at a compound annual growth rate (CAGR) of 5.66 per cent, from Rs 939 billion to Rs 1,170 billion. As of February 2019, freight earnings for 2018-19 stand at Rs 1,074.72 billion. Freight traffic grew at a CAGR of 2.51 per cent from 2013-14 to 2017-18. Though freight traffic has been steadily rising – from 1,050.18 million tonnes (mt) in 2013-14 to 1,159.57 mt in 2017-18 – the rate of increase decreased for two consecutive years before rising once again in 2017-18. As of February 2019, total freight traffic for 2018-19 stands at 1,101.79 mt.

In contrast, IR’s passenger segment has been making losses due to its unviable fare structure. From 2013-14 to 2017-18, passenger earnings grew at a CAGR of 7.42 per cent and displayed an increasing trend for the entire period under consideration, reaching the highest level of Rs 486.43 billion in 2017-18. As of February 2019, passenger earnings stood at Rs 466.12 billion for 2018-19. Starting off on a strong footing at 8,425 million in 2013-14, passenger traffic dipped sharply in 2014-15. While it continued to fall in 2015-16, there was a slight improvement in passenger traffic during 2016-17 and 2017-18. As of February 2019, it stood at 7,725 million for 2018-19.

Deteriorating financial health: Private sector must play a proactive role in meeting financing requirements

IR’s financial situation has been stressed in the past few years. This can be attributed to a deceleration in the growth of internal resources, low participation by the private sector and state governments in railway projects, low level of borrowings (as a result of poor returns on investment), and shortage of funds (government’s gross budgetary support).

Dismal growth in internal resources coupled with mounting pressure arising from successive pay commissions have resulted in a drain on IR’s finances, causing a rise in operating ratios. Considering the five-year period 2013-14 to 2017-18, IR’s operating ratio increased from 93.6 per cent to 98.4 per cent. The liability of the Seventh Pay Commission and the decline in freight earnings has been responsible for the ratio being higher than the target. For 2018-19, the revised estimate for the operating ratio was fixed at 96.2 per cent, but the actual operating ratio was 98.4 per cent. The budget estimate for 2019-20 has been kept at 95 per cent.

Unrealistic expectations: IR’s non-revenue earnings are far behind targets

In recent years, IR has been working towards monetising its assets and undertaking revenue yielding activities. To this end, it has formulated a dedicated policy to promote new ideas and concepts for enhancement of non-fare revenue. The policy though has been a virtual non-starter. Failure to have dedicated teams in place for a fixed tenure and an attempt to micro-manage rather than macro-managing initiatives have led to poor response to the policy. In 2017-18, IR earned only Rs 86 billion in non-fare revenue, compared with the original target of Rs 140 billion, with most of the revenue coming from the sale of scrap assets and station parking fees.

A tough task: Commissioning of railway tracks falls after record high

IR has been experiencing reasonable growth in its track network. From 2013-14 to 2017-18, the track network expanded at a CAGR of 0.82 per cent. As of 2017-18, the network stood at 68,312 route km. The commissioning of railway tracks touched a record high in 2016-17 when a total of 2,855 km of tracks was commissioned. Reportedly, there has been a reduction in track length commissioned in 2017-18 owing to diversion of funds to rail renewal for safety considerations. As per the progress report submitted by 16 zonal railways, till October 2018, only 12 per cent of the work had been completed (of a target of 4,100 km of new lines, doubling and gauge conversion works).

Securing rail operations: IR accords highest priority to safety

Over the past five financial years (2014-15 to 2018-19), there has been an increasing focus on safety, in light of the increasing number of accidents caused due to derailments. Over the five-year period, safety-related expenditure increased at a CAGR of 14.65 per cent. Further, in 2018-19, IR assigned a budget estimate of

Rs 730 billion for safety works, which is an 18 per cent increase from the revised estimate of Rs 621.52 billion in 2017-18. Besides, a new safety fund – the Rashtriya Rail Sanraksha Kosh – worth Rs 1 trillion has been created, of which works at level crossings and track renewals will receive the bulk of the corpus investment.

Expanding capacity: Increasing capex on rolling stock manufacturing units

IR’s coach manufacturing units have been consistently meeting their production targets. The cumulative coach production by the four manufacturing units – Rail Coach Factory, Kapurthala; Integral Coach Factory (ICF), Chennai; Modern Coach Factory (MCF), Raebareli; and DMU [diesel multiple units] Coach Factory, Haldia – increased at a CAGR of about 8 per cent between 2013-14 and 2017-18. In 2018-19 (till February 2019), the total production of the four manufacturing units stood at 5,447. In the past three years (2015-16 to 2017-18), the capex on the manufacturing units increased from Rs 20 billion in 2015-16 to Rs 24 billion in 2017-18. In 2018, a new coach manufacturing factory was sanctioned at Latur in Maharashtra. A workshop for refurbishment of LHB coaches is also being developed at New Bongaigaon in Assam. Further, there are plans to expand the production capacity of both the ICF and the MCF. In 2018-19 (till November 2018), 105 works relating to expansion of production capacity of manufacturing units had been completed, at a total cost of Rs 24 billion.

Digital transformation of IR: IT penetration slowly increasing

On the technology front, IR has introduced a number of solutions to make bookings and rail travel easier and more comfortable for passengers and with respect to freight. Many new

web- and mobile-based applications such as next-generation e-ticketing systems, freight e-demand registration, SMS alert facility, passenger complaint and suggestion systems, online monitoring of rolling stock, and a bridge management system have been launched.

Introduction of new trains: Improving passenger amenities and comfort

In the passenger segment, several premium trains such as Humsafar, Tejas and Antyodaya and coaches such as Deen Dayalu, Vistadome and Anubhuti, with improved passenger amenities, have been introduced. IR also introduced the first indigenously developed and manufactured semi-high speed train – the Vande Bharat Express (Train 18) – giving a major impetus to the Make in India programme. These new trains are equipped with advanced features such as GPS-based passenger information systems, CCTV cameras, mobile/laptop charging facilities, LED lights and modern toilets.

Conclusion

The railway sector is poised for high growth in the coming years. With the commissioning of big-ticket projects such as the new DFCs, regional rapid transit systems and suburban rail networks, market opportunities in the sector will be abundant. Moreover, implementation of new line, doubling and railway electrification projects across the country will also bode well for several market players. Such developments will not only be promising for domestic stakeholders, but will also provide lucrative opportunities to their foreign counterparts. However, to ensure that this happens, it is required that the government stays committed to improving the overall rail service scenario in the country and takes the required measures in a time-bound manner.

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