Railway Budget 2015 is bereft of opportunity

Dinesh Trivedi

I have always compared Indian Railways with Kamdhenu, the mythological cow that looks after the nation’s health. But even Kamdhenu needs to be looked after. In the case of Indian Railways, the political class has simply not understood the potential and strength of the railways, an entity that can easily add 2.5% to our nation’s GDP.

Sadanand Gowda’s railway budget last year was an opportunity lost. This year’s budget is bereft of opportunity as the railways is reeling under its deepest financial crisis ever. Purely at an operating level, it is in a terminal debt trap, as reflected in its operating ratio of 92.5% in 2014-15.

Had the railways made provisions for depreciation based on actual requirement of replacement of overall assets (nearly Rs 12,000-15,000 crore, against the actual provision of Rs 6,800 crore in 2014-15), its operating ratio would have been in excess of 100%. Moreover, appropriations for a development fund have gone down from Rs 7,800 crore in 2013-14 to Rs 300 crore in 2014-15. These are budget estimates, so the actual figures maybe worse.

The health of the railways is determined by its operating ratio: the lower the ratio, the better the health. In my 2012-13 budget, I had planned a budget not for a year but for five. I had targeted to bring down the operating ratio from 95% to 84.9% in 2012-13, and to 74% in the terminal year of the 12th Plan. Textbook solutions of privatisation, downsizing and frequent freight hikes are not enough to transform the railways’ financial health.

Scale-driven strategy, playing on volumes, reducing unit cost, reducing tariffs and gaining market share and margins can work wonders.

This is very suitable for the railways as its operating leverage is very high and variable costs are not more than 15-20%.

This strategy can also be successfully implemented by ‘resource leveraging’: getting more out of existing assets by ‘sweating’ them harder and faster. Emphasis on construction and procurement of new assets has to be replaced with renewed focus on asset maintenance, enhancing productivity and better utilisation of assets. Innovation and asset optimisation, as opposed to asset accumulation, is central to this strategy.

The entire supply-side strategy can be summarised in three words: faster (faster turnaround of trains), longer (adding additional coaches and wagons) and heavier (higher axle load) trains. Reducing turnaround time of wagons from six to five days alone can add nearly 20% of incremental freight-carrying capacity at zero additional cost. Similarly, the demand-side strategy is captured in three other words: dynamic (peak and non-peak tariff), differential (tariff for politically-sensitive and not-so-sensitive segments) and market-driven (tariff driven by the relative competitive strength of the railways). The focus has to be on value-creation, agility, customers’ satisfaction and being tech-savvy.

The key obstacles are narrow departmentalism, a monopoly mindset and the lack of commercial orientation. The railways is a mega system with several subsystems structured around various departments, which, in turn, are interdependent.

To expand the capacity of the system, several variables need to be worked on simultaneously to synergise policy initiatives.

Reducing wagon turnaround time, for instance, would require coordination among decisions regarding investment, commercial and operating policies, as well as train maintenance and examination practices. This would also require that the available funds are invested strategically to fill the gaps by adopting a systems-based approach to improve the utilisation of existing assets.

Low cost, short gestation, rapid payback and high-return investments should be given top priority in the funds allocation. Such investments would include increasing the length of the platforms and goods terminals, upgrading infrastructure at maintenance depots, and using IT to strengthen the freight and passenger operating information systems. The outcome of this strategy will get Indian Railways to start generating an annual operating cash surplus.

(The writer is a former Union railways minister)