In February, the Ministry of Railways announced the Railway Budget 2016-17. This continued a 95-year-old tradition where, like an aperitif before the main course, the budget for the Indian Railways is always announced before the Union Budget.
An entire day in Parliament dedicated to railway finance is no quirky British legacy. It exists because the railways matter significantly.
This year, the Indian Railways is expected to earn 1.7 trillion rupees through its operations. Much of this will be spent on its army of employees, present and past, through wages and pensions. With more than a million employees on its payroll, the Indian Railways is one of the largest commercial employers in the world.
But nowhere is the scale of the railway more evident than in its transport of passengers. In 2014, India was responsible for more than a billion passenger kilometers (a passenger kilometer is one passenger transported for one kilometer). On a daily basis, this translates to 23 million people — the entire country of Australia — carried on its network.
The Railways’ eternal struggle: freight vs. the people
Despite the scale of its operations, the Indian Railways struggles to make money. Operating ratio — a company’s operating expenses as a percentage of its revenue, which is the metric used to assess financial viability — remains stubbornly high, hovering around the 90% mark when 75-80% is ideal for large companies. This year’s budget forecasts an even higher operating ratio of 92%.
One important reason for these high ratios is the railway fare structure. Passenger fares, always a sensitive political issue, are famously cheap and rarely change. (Like last year, this year’s budget did not have a passenger fare hike.) Transporting a passenger one kilometer on the railway costs 0.5 rupees, yet the passenger only pays 0.26 rupees. By global standards, India’s yield per passenger is relatively low.
The low passenger fare is subsidized by freight — transporting goods on the railway is disproportionally more expensive. As a result, more freight is transported on polluting trucks on the road, despite rail being more efficient.
A report card for the Indian Railways
Beyond fares, there are other reasons for the Railways’ financial struggles. Following the 7th Pay Commission, which sets government wages, the cost of employee wages and pensions has increased significantly. Pensions alone will account for 31% of this year’s expenses and, with the number of retirees poised to increase over the next few years, this cost will only get larger. Putting even more strain on the finances are several unprofitable railway peripheral activities like hospitals, schools, locomotive manufacturing, catering, real estate development, and security.
Given these burdens, the Indian Railways has struggled to invest in its infrastructure. Trillions of rupees of projects are still pending. Even as demand for rail travel has increased, the rail network has struggled to match it with increased supply — the railway network has increased by just 0.06% over the last 25 years. Existing lines are congested, with average speeds of 70 kmph for passenger trains. Freight travels even more slowly at 25 kmph.
These are all enduring challenges that the Ministry of Railways has continuously sought to address. Since Independence, the Ministry has formed more than 20 committees, each suggesting recommendations to address these issues. Most reports have acknowledged the inefficiency in the Railways’ low fares. Yet, for political and redistributive reasons, these fares have rarely changed.
As the Railway Budget 2016 demonstrates, reform need not hinge on fee changes. There are plenty of other ways to improve the railways.
The latest Ministry report, from the Committee for Mobilization of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board, proposed recommendations around three pillars: commercial accounting, HR reforms, and establishing an independent regulator. In particular, the Committee recommended devolving power from the Railway Board. Currently, there are 68 divisions in the country reporting to 17 railway zones, which ultimately answer to the Railway Board. The Board is then tasked with policymaking, regulation, and operations for the entire country. This is neither easy nor ideal. With greater autonomy for zones and divisions, the Railway Board would be allowed to operate like a corporate board, overseeing rather than directing.
The Railway Budget 2016 — under the theme of Reorganize, Restructure, Rejuvenate — has attempted to devolve power from the Railway Board. A railway planning and investment organization will be established to draft medium and long-term corporate plans. In addition, a drafted bill will establish a Rail Development Authority, an independent organization that will regulate pricing, promote competition, and protect customer interests. The budget also seeks to reform the railway accounting system, currently an archaic system that gives little clarity about unit costs.
Beyond governance, there has been progress on the Dedicated Freight Corridors (special tracks to transport freight), which could finally solve the freight-passenger quandary. For passengers, a slew of initiatives to improve the Railways experience were announced, such as cleaner toilets, better food, and easier ticketing.