Railway privatisation in India: Opportunities and challenges

by Chitresh Shrivastva

Tejas express

India's first Tejas train (Mumbai–Goa).  JoegoaUK via Flickr

Indian Railways occupies a prominent position in the country’s transportation and significantly contributes to the Indian economy through foreign direct investment, which helps to strengthen the 166-year-old network and improve passenger and freight operations. However, with the fast-paced development of railways across the globe, developing countries such as India are slowly sinking under the pressure of investment crunches at the state level, infrastructure disintegration and losses on the non-core front. Under a constrained state budget, and without additional investment, the welfare of employees and rising variable costs are difficult to regulate. At this juncture, the collaborative efforts of private players are crucial for dividing responsibilities and promoting equitable and holistic development, with no absolute rights for any party. The emerging private model of train operations in India is a testimony to striking a balance between governmental and corporate obligations.

Private rail routes in India: Not a smooth ride

Since independence, Indian Railways has been under state control. The first three decades saw some massive transitions as India pursued the objectives of self-sufficiency, enhancing haulage capacity and developing a long- and short-distance high-speed network, in line with its growth as a member of the International Union of Railways, established in 1922 to help homogenise railway developments irrespective of their stage of development. The future of Indian Railways as a state owned-organisation, however, came into question post-globalisation, with the first financial crisis of 2001 casting its shadow: with a balance of only Rs 350 crore, it could not cover its basic operating expenses, which resulted in the constitution of the Rakesh Mohan Committee. The committee was the first to expose the railways to the idea of corporatisation or privatisation on the grounds that in a state-run setup, where the social and operational domains run in parallel, it would be impossible to sustain the variables of core segments, and greater emphasis on performance and monetary maximisation would help meet variable costs.

Subsequent panels such as the Debroy Committee have also pushed for a corporate approach to help improve productivity and performance in the core and the non-core sector, convincing not only the government, but also passengers to trust in corporate practices, while also inciting concerns and resistance by employees over job security. At the consumer end, the economics of fare structuring and possible fare inflation might not only reduce occupancy levels, but also deprive the railways of their existing market share, which has declined significantly in both long- and short-distance passenger traffic in light of the growing network of roads and air travel ­– the boom of the Regional Connectivity, or UDAN, Scheme poses a particular challenge.

Some areas of potential strategic reform include catering, ticketing and station modernisation. There has been growing pressure on the strategic business units such as the Indian Railway and and Catering Tourism Corporation (IRCTC), which has been saddled with responsibilities beyond catering and tourism, resulting in reduced efficiency. The redistribution of human and material resources is thus a more feasible solution.

Treading cautiously: UK railway privatisation

Indian Railways is not new to the experience of privatisation. The very roots of the railway network’s expansion 166 years ago are associated with the guarantee system, under which the private players were entrusted with the responsibility of constructing and operating trains, and 5% of the profits were paid to the government. The policy, however, came with the additional provision of adequate compensation if the company failed to pay the 5% profits, saddling the government with an additional liability of RS 76 crore and bringing the guarantee system to a close.

Fast-forward to the globalisation period and beyond: while India continued to manage the Railways through the state machinery, the UK, inspired by Margret Thatcher’s famous statement ‘The government has no business to be in business’, underwent a privatisation process. Similarly, the US saw the arrival of its first railway system without any form of public support, while Japan restructured its railways into seven different companies with the aim of expanding the network and promoting better human-resource management. But there is a catch to privatisation, which India should be mindful of as it decides to implement the privatisation of 150 trains, particularly given the class of passengers who travel by rail. In the UK, the anticipated benefits of privatisation have backfired, with train fares overshooting the cost of flights and a gradual shift from the railways to the airlines. Trains have also suffered in terms of efficiency and due to irrational decisions by railway companies.

The Indian scenario

When the railways are viewed as the transport of masses, privatisation becomes even more tricky. The foremost point to be kept in mind is the diversity of train services: premium, ordinary, mail and express. So, how should we privatise train routes? Over the years, various governments have adopted a multitude of measures to help improve efficiency as well as catering and maintenance. Under the BJP, there has been a consistent push for corporatisation to help Indian Railways fulfil its social obligations and non-core activities and bring its costs under control. The growing financial distress is attributed to excessive cross-subsidization –reduced passenger fares and increased freight fares, with the Railways recovering 57% of the cost

Over the years, the quest for modernisation has seen an increase in fares through the introduction of the flexi fare on premium trains, which has earned the Railways an additional RS 500 crore. However, it has  also reduced occupancy on selected routes as the fare increase has failed to match services. The government may be hoping to remedy this through public-private partnership and roping in private players to handle rolling stock and baggage-handling facilities, while the Railways provide the essential human resources of train engineers and guards.

Challenges to privatisation: Understanding India’s first ‘private’ train

Across the globe, there are glaring differences between railways in developed, developing and underdeveloped countries, which has brought about the need for diplomacy on the technology and cultural fronts. Railways have been the concern of international organisations, with a UNESCAP report of 2003 terming them a sunset industry in need of restructuring, especially in countries such as India, which have for years seen underinvestment and political interference. Various new measures were therefore adopted by the newly formed National Democratic Alliance in 2016, which sought to increase the power of the railway administration at the zonal level with the aim of catalysing development at the micro level. This task, however, has yet to gain traction and, given the state’s increasing liabilities, it has now been decided that it should disinvest in the strategic business segments and increase private participation.

Now, let’s have a look at India’s first ‘private’ train, though it seems an inaccurate term for the New Delhi–Lucknow Tejas Express and the forthcoming Mumbai–Ahmedabad Tejas Express. There are two sides to this new policy: one, the growing interest of airlines in private train operations on loss-making routes, and two, the strong condemnation of the policy by railway unions fearing job security and a possible withdrawal of benefits otherwise enjoyed in a government setup, despite the government’s clear stance on not privatising the railways.

There are possible economic challenges in terms of train occupancy and fare restructuring. With an increase in non-core development, there is a greater chance of micro-level charges being implemented in the fare component, increasing travel costs, which need to be strictly regulated. Given the magnitude and spread of the railways, synchronisation on a larger scale is needed with special-purpose vehicles and regulatory authorities being constituted by the government before the full-scale implementation of privatisation, to help maintain a balance between government and private control and not dilute the role of the government as a whole.

A further challenge lies in a greater focus, under privatisation, on trunk and chord routes with less on lines of strategic importance that connect the hinterlands or bordering areas. These require greater attention, as do areas in need of greater rail connectivity such as the northeast, which has received immense support from the BJP government through the Uniguage policy. Can this be entrusted to private partners? Will they act beyond the pursuit of profit and keep an eye on strategic areas as well?

Encouraging an open-track policy

From a study conducted by the Indian Institute of Management Ahmedabad, in collaboration with the United Nations Environment Programme, Infrastructure for Low-Carbon Transport in India:  A Case Study of the Delhi-Mumbai Dedicated Freight Corridor, which also emphasises track usage charges, it can be inferred that there needs to be an open-track policy to help private players reach out to places that are gradually becoming connected through railways, and that this should be on a 50:50 profit-share basis to help the ministry pool funds for financing both core and non-core projects.

It would be commercial blasphemy to assume that corporatisation will  put the onus on players to construct new routes and expand strategic routes. The major interest of participants lies in operating a greater number of trains between cities and, more importantly, a greater operational increment between tier-II cities, which have of late gained immense significance with the ambitious semi-high-speed project. This being the focal point of attraction for the privatisation drive will help boost important investments in infrastructure and technology, given the expertise of the airline industry in terms of aircraft leasing, promoting similar practices, while rationalising the number of trains operating on important revenue-generating routes. It can be made possible through the promotion of an open-track policy and restructuring zones by means of merger or closure, thus helping improve traffic flow and train speeds and setting a precedent for trains under private control.

Privatisation as the way towards an efficient and competent railway system

Indian Railways has for the first time undergone a massive transition by adopting corporate practices, inviting both bouquets and brickbats from the public and railway unions. At the same time, the airline sector has weakened under growing economic stress, technical restraints and insolvencies, as seen in case of Jet Airways, and growing competition with railways as they equally try to upgrade on the technical and infrastructural fronts (though it will be some time before the railways are on an equal footing with the airline sector). The current induction of private players to help improve the efficiency of the railways will create a new environment in which performance matters and traces of profit orientation may soon be visible. With growing electrification,  even though we are eliminating diesel in a phased manner, we are not yet fully independent of fossil energy, as a lot of coal is needed for electricity generation. The entrance of private players could be an impetus for research and development, helping to develop cleaner sources of energy, which would help Indian Railways achieve its twofold mission of energy efficiency and speed. Ultimately, the role of government cannot be completely ruled out and it is necessary for it to establish competent authorities for required vigilance in the areas of safety, tariff regulation, station development, catering and other activities, which are central to a successful endorsement of corporate practice.

About the author

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Chitresh Shrivastva is currently an Adjunct Faculty at the Department of Media Studies, CHRIST (Deemed to be University), Bangalore. He is also a guest columnist and analyst on railway policies.

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