Privatisation Is Only Hope For Indian Railways; Time For Modi To Accept Reality

In 2016, India’s airline industry reported a 25 per cent jump in passenger traffic; in December 2016, the second month after demonetisation of high-value notes, when many other sectors were reeling under the impact of a cash crunch, the airline sector grew 24 per cent over the corresponding month of the previous year.

In contrast, Indian Railways, which Prime Minister Narendra Modi hopes will become the “backbone” of India’s economic progress, saw a 2.3 per cent decline in traffic receipts in April-December 2016. Passenger traffic was 9.1 per cent below target. The railway administration’s efforts to milk higher revenues from prestige trains like Rajdhani and Shatabdi through flexi-fares fell flat on its face, with traffic actually falling in the initial months.

At the lower end of the market, bus travel is gaining market share, thanks to lower ticket prices, improved road quality and more convenient schedules. Ease of booking bus tickets through apps is making even urban citizens take to bus travel for distances involving upto 12 hours of travel time.

According to figures released by the Railway Ministry’s own white paper in 2015, the railways’ share of GDP has now fallen below 1 per cent (it was 0.9 per cent in 2012-13), while road transport was more than five times its size, with a GDP share of 4.9 per cent and growing. Air transport’s share was 0.3 per cent, but given the scorching pace of growth over the last four years, one can assume that it will rival the railways in a decade or so.

Indigo, the market leader, has nearly 400 Airbuses on order; SpiceJet, which looked like becoming another Kingfisher till a year or two ago, has revived, and has just ordered 205 planes from rival manufacturer Boeing.

Assuming 12 per cent annual growth, air passenger traffic will double in six years, and possibly double again over the next six. By 2028 or 2030, air travel could well become the preferred mode of travel compared to rail travel, assuming rail passenger traffic continues to stagnate and fails to enthuse the customer.

As T N Ninan pointed out in Business Standard last week, the Indian Railways’ business model is broken, with both passengers and freight deserting it. At the top end, air fares are cheaper than upper class tariffs in prestige trains, assuming one books in advance. At the bottom end, bus fares are cheaper than trains over short distances. And the railways has been losing freight traffic in all but bulk goods (coal, steel, fertiliser), while pipelines have taken over the movement of goods like oil and gas.

Given this scenario, it is not difficult to see Indian Railways becoming the sick man of Indian transport infrastructure rather than its future backbone. While dedicated freight corridors will improve its competitive position when it comes to moving bulk freight, unless it is able to target non-bulk freight traffic, these investments may not pay off.

As for passenger traffic, it is already losing the game despite subsidising passengers to a high degree. According to the white paper presented by Railways Minister Suresh Prabhu, the railways recover less than half the cost of moving passengers through its system; but for profits from bulk freight movement, the railways would be deeply in the red. And high freight costs ensure that it is steadily losing out to road transport.

The reasons are not difficult to see.

One, with nearly 1.4 million employees on its rolls, the Indian Railways is simply overmanned and underproductive. It moves 0.44 million net tonne km per employee annually against China’s 1.23 million and Russia’s 1.81 million.

Two, despite efforts by the Modi government and the previous government to refocus the railways on customers, the white paper has this to say:

Put another way, the railways is unable to compete with airlines and bus services on either cost or quality. It is difficult to see how more investments will improve the situation, given that rail fares are already below break-even levels. Increases in fares after higher investments will worsen its competitive position rather than improve it. However, there is some hope in freight.

Maybe, just maybe, Indian Railways should focus more on freight than passenger traffic, and privatise passenger services first.

The writing on the wall is clear: Indian Railways does not have a future as long as it is part of a moribund state system where employee wage costs will only spike upwards while service quality will remain indifferent at best. The Seventh Pay Commission would have done nothing to improve matters, where costs rise without any improvement in productivity.

More revenues are possible from the privatisation of some services – like station upkeep, train branding, real estate development on railway excess land, etc – but the fundamental operations seem unviable at least on the passenger carriage front.

To repeat, the bold print says: privatise, privatise, privatise. Narendra Modi may believe that good managers can run public sector entities well, but he is likely to be proved wrong. The system simply does not allow for such miracles.

We have seen what happened to Air India or BSNL or MTNL due to private sector competition. In the case of the Indian Railways, where state monopoly remains intact, the customer is just opting for substitute modes of travel and freight movement instead of railways. That is the Indian citizen’s ultimate vote of no confidence in a state-run transport service.

Atal Behari Vajpayee’s road building zeal may have just about delivered a long-term death blow to Indian Railways by making it less viable. The UPA’s airport privatisation and open skies policies may have chopped demand from the pricier end of the market.

Indian Railways is caught in this pincer and as long as it remains in the state sector, it has no future. Instead of financing a bullet train, Modi must bite the bullet on privatisation.

It is just as well that the railway budget is being abolished from this year. The question is, can Suresh Prabhu work wonders to make it viable by staying out of the public eye? It may not be worth sacrificing a good minister’s reputation on something that cannot ultimately succeed.