The railway sector has proved to be a key contributor to India’s response to the Covid-19 crisis. Freight and parcel trains have been transporting essential commodities when other modes of transport have come to a halt. Though the pandemic is likely to have a significant impact on railway projects with difficulties related to labourmobilisation, material procurement and liquidity constraints, the sector is likely to witness continuity in investment despite the slowdown. However, this would require strong policy and financial support, new ways of funding and other reforms to enable spending. Indian Infrastructure presents views of leading experts on the impact of Covid-19 on the sector’s performance…
What has been the impact of Covid-19 on the railway sector?
Like most of the sectors in India, the unprecedented Covid-19 pandemic has hit the railway sector hard. All passenger train operations were suspended from March 25, 2020, the date of the nationwide lockdown. During the initial lockdown period, freight train operations were also limited to carrying essential commodities to various parts of the country. Passenger movement for April-July 2020 dropped from 1,031.49 million (during the same period of the previous year) to a mere 8.57 million passengers. The volume of freight transported during this period also reduced by 21 per cent to 241.55 million tonnes (mt) vis-à-vis the previous year.
This downturn in operations is expected to adversely impact Indian Railways’ (IR) finances in 2020-21. IR had estimated revenue from freight operations for the year at Rs 1.47 trillion and revenue from passenger operations at Rs 610 billion. However, the adjusted passenger revenue is now expected to be much lower. All this will impact IR’s operating ratio as well, as it will still have to incur fixed costs such as staff wages and pensions that account for more than 65 per cent of the expenditure.
Professor G. Raghuram
Covid-19 has had a significant impact on the railway sector. The passenger train services came to a grinding halt to prevent transmission of the virus through the usually not-so-socially-distanced traffic in trains. It has also had a major impact on the suburban train segment, bringing public transportation to a halt in cities such as Mumbai, Kolkata and Chennai.
IR has lost passenger revenues, without a commensurate decrease in costs, thereby creating cash problems that are expected to affect infrastructure investments and pension payments (which will now have to come from the larger government coffers). While this has been the negative impact, there have been positive gains in the ability to run freight trains in a relatively unimpeded manner. The average speed of freight trains has nearly doubled. In the initial period of the lockdown, even freight demand was down, but with increasing unlocking, freight traffic is back to the expected volumes. Another positive impact has been in the ability to undertake repairs of many fixed assets like bridges and upgradation of alignment stretches under easier traffic conditions.
The rail sector has been impacted sharply by the Covid-19 pandemic and the consequent lockdown. Freight transportation contributes approximately 70 per cent of the total earnings of IR. While the lifting of various commodities in terms of tonnage has declined by approximately 13.5 per cent in the April-August 2020 period, revenue has declined by 22 per cent. The sharper drop in revenue is a result of the reduction of approximately 18 per cent in net tonnekilometres (NTKM) earned due to shortened leads for major commodities such as coal, cement, iron and steel, and foodgrains.
The adverse impact of reduced leads and NTKM was more pronounced in the case of transportation of coal and iron and steel products. In the case of coal, loading dropped from around 246 mt to around 190 mt, a drop of approximately 22 per cent, but earnings dropped by around 37 per cent due to a 40 per cent drop in NTKM. For iron and steel products, loading dropped from around 22 mt to 20.5 mt, a drop of only 6.6 per cent, but earnings dropped by around 29.5 per cent due to an over 27 per cent reduction in NTKM.
Reduction in international trade adversely impacted the transportation of containers, leading to a reduction in loading of around 14 per cent. However, earnings dropped by 21.5 per cent due to reduced NTKMs indicating lower volumes being moved from the northern hinterland inland container depots, which are at a longer distance from the ports. Container train operators suffered losses due to the imbalance between imports and exports leading to substantial empty flat movement and stabling of rakes.
In the passenger segment, the picture is more dismal as almost all passenger classes except second sleeper saw a 100 per cent decline in traffic as compared to the previous year due to complete stoppage of services. Second-class passenger traffic did not drop as sharply as IR ran Shramik Specials to transport migrant labour. The passenger segment has always been blamed for IR’s reduced profitability given the cross-subsidy requirement of over Rs 500 billion from the freight segment. Therefore, reduced movement of passenger trains would intuitively indicate better profitability. However, the high overhead fixed costs negated the benefits that should have resulted from a reduction in the scale of operations of the loss-making passenger segment. With no reduction in overheads and reduced earnings, there will be a severe impact on the operating ratio. The operating ratio of 98 per cent achieved last year is expected to go well above 100 per cent this year.
Based on the issues that have been faced, what has been the industry’s response to the pandemic?
IR is the single buyer in the railway sector and the entire ecosystem of suppliers and contractors is dependent on demand from it. With passenger trains not resuming full services, there is an impact on annual maintenance-related expenditure and this will translate into muted orders for component suppliers. The extent of impact will depend on their respective areas of operations.
The response of IR itself to the pandemic has been remarkable and the organisation has demonstrated agility and ingenuity to adapt. To help in the transportation of essential commodities during the lockdown, the railways started the Annapoorna and Jan Kisan special freight trains which hauled around 3.2 mt of food-grains from April 1, 2020 to April 16, 2020, as compared to 1.29 mt during the same period of the previous year. IR has also started running parcel cargo trains on 65 routes. It ran special Shramik trains from May 1, 2020 to July 9, 2020 to ferry stranded migrant workers to their home states, and transported over 6.3 million workers. IR also demonstrated the capability of utilising its production units to manufacture personal protective equipment, ventilators and hospital beds. It provided 6,500 hospital beds to government hospitals, and manufactured around 0.6 million reusable face masks and 40,000 litres of hand sanitiser. It also designed 5,000 corona isolation unit coaches, fully equipped with all the necessary medical equipment.
Professor G. Raghuram
IR has used this opportunity in many ways that could have long-term implications. First, as a participant in the quick medical response to Covid-19, many railway coaches were converted into quarantine areas and “Covid care” centres. These coaches assisted the national response, especially since they could be moved to locations where similar facilities were not available. Second, passenger train services called Shramik Specials were run in a controlled manner to address the needs of migrant labour who wanted to go back to their homes. Following this, limited services were introduced between major cities for movement of people on essential grounds. This was also true for Mumbai’s suburban services. During this time of nil or very limited passenger services, IR is using the opportunity to rework the schedules of most passenger trains, using a zero-based approach. At the same time, critical works for asset maintenance and upgradation were and are being planned and executed. In terms of freight trains, there has been experimentation of running long services of two, three and even four freight trains coupled together, to bring about efficiency in freight train running. These have been called the Python, Anaconda, Sheshnaag and Vasuki after real and mythological snakes.
While long-haul services have already been considered, I feel that even less-than-normal train load or relatively small train load services should be considered to provide a higher frequency and in a scheduled manner. Services of this kind can attract road traffic towards rail. The export train services to Bangladesh with agricultural produce and a few parcel train services have been steps in the right direction.
More thought has been given to involving the private sector in train services and has translated into policies for implementation.
Notwithstanding the above losses, IR, at this juncture, is contributing to the economic recovery process by continuing to spend on capital works at the same level as last year – an expenditure in excess of Rs470 billion, which is 4 per cent more than the previous year, as per provisional figures up to end August. The creation of infrastructure has continued despite the challenges posed by Covid-19, and this appears to be the only silver lining in an otherwise dark picture.
What is the outlook for the sector based on the current situation?
On a medium- to long-term basis, the outlook for the railway sector will continue to remain positive. With the Vision 2030 of the Ministry of Railways (MoR) of investing Rs 50 trillion in the sector, its long-term outlook will remain positive. However, on a short-term basis, in the next couple of years, some adjustments to these capex plans will be made. For instance, the MoR has decided to suspend all new/umbrella works included in the Pink Book in 2020-21. Only those works that impact the safe running of trains and are essential and unavoidable will be considered for execution. However, given the size and per capita income levels in the country and the challenges faced in both the road and aviation sectors, railway will be preferred as the mode of transport. It is expected that railway operations will be back to normal levels by next year. The railway sector, being largely government owned, could also be an important conduit for pump-priming the economy.
Professor G. Raghuram
The rail sector in India is still a sunrise sector. Rail is the most energy-efficient mode of land transportation and should naturally grow with the right policies. Partnerships with the private sector in customer-facing activities have immense opportunities. There has been movement on the freight side with more acceptable (after many iterations over a couple of decades) wagon ownership and private freight terminal policies.
There is currently a visible effort to privatise passenger services with state-of-the-art coaching stock. However, it is important to learn from the lessons of opening up container train operations to the private sector.
IR’s prospects for the remaining part of the financial year will depend on how the economy picks up post the pandemic. As of now, the outlook does not appear to be very bright. Just to take one example, the movement of coal is expected to remain stagnant or decline further as most thermal power plants have coal stocks for over 100 days and are running at plant load factors of less than 60 per cent. Similar pictures emerge for other commodities such as cement and iron and steel.
What will be the key priority areas in the post-Covid world?
The key priority areas for the sector in the post-Covid world will be to bring traffic back to the railway network and relook at digital interventions as enablers for getting this traffic. The first priority area for the railways will be providing a safe mode of transport to its passengers. Work has already been initiated in this direction in the form of post-Covid passenger coaches designed by the Rail Coach Factory, Kapurthala. These coaches with hands-free amenities, plasma air purification, and foot-operated water taps, soap dispensers and lavatory doors will help in regaining the confidence of passengers.
Another major thrust area will be digitalisation. The difficulty in maintaining physical distancing at booking centres together with the presence of over 350 million smartphone users in the country will provide a boost to digital ticket booking.
There will be a focus on increasing revenues from freight operations. IR is expected to focus on attracting additional commodity volumes (including roll-on roll-off and parcels) through a mix of tariff and non-tariff measures and policy initiatives. There is also expected to be increased effort to involve the private sector in railway infrastructure investments. The initative to introduce 150 private trains is a step in this direction.
Professor G. Raghuram
The most important priority area would be to source funds, which will be required not only for various investment projects, but also to tide over operating cost requirements due to revenue losses. More open policies to attract the private sector for investment and services would be the way to go.
Passenger services would need to begin in a controlled manner, adhering to physical distancing norms. This may be the opportunity to increase passenger fares, have targeted subsidies for migrant labour and short-haul commuters (compensated by other entities like the centre/states) and moderate passenger demand. Value-added services for segments such as pilgrims and tourists would also be an opportunity. In terms of freight train operations, while long hauls have been experimented with, it would be important to consider variable-length scheduled freight trains to bring in traffic from road to rail.
This could be the time for IR to reposition itself with a strong market orientation, providing value-added services and being a key engine of growth for the economy.
A key area of focus for IR will be encouraging public-private partnerships. It has planned the privatisation of passenger train operations and modernisation of selected railway stations. The disinvestment of Container Corporation of India Limited is also being vigorously pursued jointly by IR and NITI Aayog. However, whether they achieve closure before March 2021 remains to be seen.