Trends and Outlook

The railway sector has been on a high growth trajectory over the past few years. There has been a surge in activity in terms of the launch of big-ticket programmes and schemes, upgradation of age-old technologies and an increase in project uptake. Station redevelopment and modernisation works are in full swing. Work on the country’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. Further, passenger safety and comfort is being accorded the highest priority with the provision of new technologies, systems and amenities. There have been steps towards digital transformation of the railways that has been on Indian Railways’ (IR) priority list for a long time. A number of initiatives are also being taken to improve the share of revenue from the freight business.

A snapshot of the noteworthy trends over the past year and the outlook for the sector…

  • In Union Budget 2019-20, the railway sector has been one of the key investment areas of the government. It has received the highest ever allocation of Rs 1.6 trillion. Of the total outlay, Rs 658.37 billion will be sourced from budgetary allocations, Rs 2.67 billion from the Nirbhaya Fund, Rs 105 billion from internal resources and Rs 835.71 billion from extrabudgetary resources. The operating ratio is targeted to improve from 96.2 per cent in 2018-19 to 95 per cent in 2019-20. Some of the other key announcements for the railway sector are the formulation of a new public-private partnership (PPP) model to encourage private participation, greater investments in building suburban rail networks through the special purpose vehicle route, and the launch of a massive programme for the modernisation of railway stations in 2019.
  •  Freight traffic carried by IR witnessed a higher year-on-year growth of 5.33 per cent in 2018-19, as compared to 4.78 per cent in the previous fiscal year. From 2014-15 to 2018-19, freight traffic grew at a compound annual growth rate (CAGR) of 2.76 per cent. In the first quarter (April-June 2019) of the current fiscal year, total freight traffic stood at 306.89 million tonnes (mt). From 2014-15 to 2018-19, freight earnings grew at a CAGR of 4.71 per cent, from Rs 1,058 billion to Rs 1,272 billion. During April-June 2019, freight earnings stood at Rs 290.67 billion.
  • In contrast, IR’s passenger segment has been making losses due to the unviable fare structure. From 2014-15 to 2018-19, passenger earnings grew at a CAGR of 4.85 per cent. During April-July 2019, passenger earnings stood at Rs 134 billion. Passenger traffic grew at a meagre CAGR of 0.63 per cent from 2014-15 to 2018-19. During April-June 2019, total passenger traffic stood at 2.07 billion.
  •  In 2018-19, gross traffic receipts stood at Rs 1,967.14 billion and total working expenses were Rs 1,888 billion. Dismal growth in internal resources coupled with mounting pressure arising from the impact of successive pay commissions have resulted in a drain on IR’s finances, causing a significant rise in operating ratios. Considering the five-year period 2014-15 to 2018-19, IR’s operating ratio increased from 91.3 per cent to 96.2 per cent (revised estimates). The primary causal factors for this increase are the increased liability due to the implementation of th Seventh Pay Commission and the decline in freight earnings. For 2017-18, the actual operating ratio was 98.4 per cent. The budget estimate for 2019-20 has been kept at 95 per cent.
  • Despite concerted efforts, IR’s non-fare revenue earnings are far below target. In the past few years, IR has been working towards monetising its assets and focusing on revenue yielding initiatives. IR is planning to allow all rail engines to be used for corporate branding. Adani and Amul will be among the first few entities to showcase their products on locomotives. Besides locomotives, wagons are also available for advertisement. The national transporter is also planning to provide free video streaming to passengers on railway stations and trains. Once this plan is implemented, IR plans to start placing advertisements on the content to generate revenue.
  • IR has achieved reasonable growth in its track network. During the past three years (2016-17 to 2018-19), 8,313 km of railway tracks including new lines, gauage conversion and doubling works have been commissioned. As of 2017-18, the network stood at 68,442 route km. The commissioning of railway tracks touched a record high in 2016-17 when a total of 2,855 km 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.
  • IR’s coach manufacturing units have been consistently meeting their production targets. The cumulative coach production by the three coach manufacturing units – the Rail Coach Factory, Integral Coach Factory (ICF) and Modern Coach Factory (MCF) – increased at a CAGR of 16 per cent between 2014-15 and 2018-19. There has been a complete switchover to the production of safer Linke Hofmann  Busch (LHB) coaches. In 2018-19 (till November 2018), the cumulative production by the manufacturing units stood at 3,792. In 2018, a new coach manufacturing factory was sanctioned at Latur in Maharashtra at an estimated cost of Rs 4.9 billion. A workshop for refurbishing of LHB coaches at New Bongaigaon at a cost of Rs 900 million was also sanctioned in 2017-18. Further, Rs 4.87 billion has been sanctioned for augmenting the capacity of the ICF, Chennai, from 1,700 to 2,750 coaches per year. Similarly, Rs 4.8 billion has been sanctioned for augmentation of production capacity of the MCF from 1,000 to 2,000 coaches per annum.
  • IR is preparing new initiatives and schemes to ramp up PPP projects in the sector. It has already taken up the redevelopment of the Habibganj railway station through the PPP mode. Work on the station is expected to be completed by December 2019. Apart from Habibganj, the Gandhinagar, Surat, Chandigarh, Anand Vihar and Baiyappanahalli railway stations are also being redeveloped into modern transit hubs.
  • The national transporter is divesting its stake in public sector enterprises (PSEs) to mobilise additional funds for the creation of rail infrastructure. IR successfully completed initial public offering issuances of three of its PSEs – RITES Limited, IRCON Limited and Rail Vikas Nigam Limited – in June 2018, September 2018 and March 2019 respectively. It plans to divest a 10 per cent stake in the Indian Railway Finance Corporation in September 2019.
  • IR is actively moving towards automation and digitalisation to improve both passenger and freight operations. State-of-the-art technologies such as electronic interlocking systems, GPS-enabled fog pass devices, real-time train information systems and train protection and warning systems have been adopted. There is also increased focus on digital technology with the launch of a number of initiatives – Rail Cloud Project, e-payment through UPI/ BHIM, Railsaver application, installation of point-of-sale machines, etc.
  • In light of the increasing number of accidents due to derailments, there has been increasing focus on safety. Over the five-year period (2014-15 to 2018-19), 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, 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. Works at level crossings and track renewals will receive the bulk of the investment from the fund.

Sector outlook: IR has set ambitious network expansion, electrification and decongestion targets

  • IR has ambitious expansion and modernisation targets, which will require at least Rs 50 trillion worth of investments by 2030. It plans to lay 22,825 km of new lines and undertake 12,215 km of line doubling works in the next four to five years. Besides, electrification of at least 28,000 route km is targeted for completion by 2022.
  • Rolling stock will continue to be a focus area for IR. It plans to manufacture a total of 4,941 coaches in 2019-20 and 4,839 coaches in 2020-21 and is setting up 17 new manufacturing units.
  • It also plans to develop two new DFC corridors, the East-West DFC and the East Coast DFC, that are expected to be completed by 2027.
  • While many noteworthy measures have been taken, much still remains to be done. The sector is mired in political uncertainty, and this affects service delivery and the financial health of the sector. A huge backlog of projects is testimony to this fact.
  • For the sector to grow, key issues such as procedural delays and financial instability need to be addressed by policymakers. While the government’s vision is to involve private players in the sector, this will happen only when policy execution esnures a level playing field. Policy initiatives will hold meaning only if they are effectively implemented.

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