Railways in the red

Pushing up freight charges to subsidise passenger services has resulted in railways losing out to road transport


In less than three weeks from now, the formidable minister for railways, Mamata Bannerji, will present her second budget. She will do so at a time when the Indian Railways are in deep financial trouble, arising out of the steady loss of market share of freight to road transport. This share is down from 82 per cent in 1970 to less than 40 per cent now.

There are two reasons why this has happened. One is that, thanks to the policy of cross-subsidising passenger services, freight rates have gone up every year for the last 30 years. The average rate per passenger kilometer is not even two-third of the average cost per passenger kilometer. Since 1996, over 80 per cent of the increases in costs of passenger services have been left uncovered. The remaining 20 per cent have been passed on to freight operations.

So the Railways are finding themselves in these financial difficulties mainly because of the losses on passenger services. Passenger traffic accounts for 57 per cent of output but only 28 per cent of revenue. In 1997-98 passenger services led to a loss of Rs 4,312.94 crore for the railways. These losses have to be covered by attempting to generate profits from freight operations. This year, the loss is expected to be in the region of Rs 3,000 crore. 95 per cent of these losses arise from the second class, ordinary sleeper and suburban services, all of which do not even cover their cost.



The other reason is the advent of multi-modal transport that allows door-to-door service, a development that the Railways have been slow to exploit. Add slow speeds, corruption, and the absence of managerial flexibility at the operating level, and the recipe for disaster has been completed. In addition, the priority to passenger traffic has had an adverse effect on the speeds of goods trains because right of way is given to passenger traffic. So while the speed of goods train could average to 75 km/hr in theory, in practice the average speed is only 22km/hr, because of stoppages for passenger trains. To allow a passenger trains to pass the goods train has to move over on to the loop line and stop there. Overall, the effect of high prices and poor service has been the dramatic loss in market share.


The result is that the operating ratio, which is defined as the ratio between expenditure and earnings, has also been deteriorating. Officially, the Railways have shown the operating ratio to be 98 per cent after taking credit for the Rs 2,000 crore. But adjusting for this deficit, the operating ratio is probably over 100, which means that expenditure is more than revenue. It could be anywhere between 102 and 105.


The loss in freight traffic has been both in bulk and non-bulk categories. Thought cement, steel and foodgrains have seen sharp declines, the biggest decline has come in the category 'other than bulk' where the volumes involved are lower and so the option to shift to road was more attractive as wagon supplies became restricted or erratic. In the last twenty years they have shifted almost entirely to road traffic and their contribution to tonnage has fallen from 15 to 3 per cent. Consequently, the burden of subsidising passenger traffic is becoming increasingly heavier for a smaller and smaller basket of goods. Railways now depend on six goods for 95 per cent of their earnings.



The Railways needs to avoid the temptation of raising freight rates, in order to make up for the losses on the passenger side. Indeed, given that 70 per cent of their costs are fixed and sunk costs, they should probably cut freight rates in order to increase their market share, which has been steadily eroded by road transport.

The impact on rail finances has been dramatic. For instance, in this financial year, the dividend to the general revenues had to be deferred to the extent of Rs 1,500 crore and credit was taken for Rs 500 crore as revenue from the RailTel Corporation -- which is yet to be formed. It was this that enabled the Railways to present a surplus budget when, in fact, they were in deficit at least to the tune of Rs 2,000 crore. In the next financial year, if dividend is restored, even at the old level, and no credit is taken for RailTel, the deficit is likely to be around 2,300 crore.


An additional problem is the increasing pension burden. The contribution to the pension fund now comes to around 15 per cent of total expenses, up from 4.5 per cent in 1980. This is because the wage bill is almost 60 per cent of total working expenses.

The Railways also bear a very heavy social burden. During the year 1999-2000, the cost of these social service obligations was nearly Rs. 2,900 crore.

However, whereas in other countries, they are compensated for carrying these obligations by the government, in India no compensation is provided. This, in spite of recommendations by various Committees.


There is no alternative for the Indian Railways but to increase the passenger fares and eliminate the heavy cross subsidisation of passenger services by freight services soon. A review of the public service obligations and the commercial priorities of railways is urgently needed. But it does not seem likely that this will be done under the present minister. Overall, it is reasonable to expect the Railways to go deeper into deficit.