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Indian Railways – where is it headed?

March 14th, 2011 No comments

The general discussion on the Railway Budget concluded in Parliament this week. During the discussion, several MPs made a reference to two important documents tabled by the Railway Minister in 2009 – the ‘White Paper’ on Indian Railways and the 2020 Vision document.

The documents provide good insight into the operational and financial performance of Railways over the previous five years. They also throw light on the challenges that confront the Railways today. It emerges that Railways has relied heavily on increasing utilization of existing assets to manage the increase in demand. The system is otherwise severely constrained by lack of adequate capacity.

Scenario so far (2004-09)

Growth in traffic and earnings

Rail transport demand is linked to the growth in GDP. As a result, the two main businesses of Railways – Passenger and Freight – have both seen significant increases in traffic in recent years.

Passenger traffic has grown at an average rate of 10% each year. Earnings have increased at a slightly higher pace, implying that most passengers have been spared increases in fare. Standalone, passenger operations have continued to be loss making. Freight traffic has grown too, but at a lower rate of about 7% and unlike the passenger segment, freight fares have increased significantly over these years.

Freight forms the backbone of Railways’ revenues. Even today, it continues to account for almost two-thirds of total earnings. However, Railways’ market share in freight has decreased steadily over the past few decades – it dropped from 90% in 1950-51 to less than 30% in 2007-08. The main reasons for this decline are high pricing (to subsidize passenger travel) and lack of sufficient infrastructure. Railways are unable to provide time-tabled freight services. In addition, there are no multi-modal logistics parks that could have provided door-to-door cargo services.

Infrastructure constraints

Since 1950-51, route-kms have increased by just 18% and track-kms by 41%, even though freight and passenger output has gone up almost 12 times. Specific issues include:

  • Common corridor for both freight and passenger traffic – With freight trains on the same corridor, operating fast passenger trains becomes extremely difficult.
  • Concentration of traffic – More than half the total traffic moves on the golden quadrilateral and its diagonals; large parts of these sections are now already saturated.
  • Limited capacity for production of rolling stock, particularly locomotives and EMUs.

The above constraints require investment in network and capacity augmentation, including dedicated freight corridors. Hence, a substantial increase in funding is necessary. The Vision 2020 document planned to deploy Rs 14 lakh crore in the next 10 years towards development of rail infrastructure.

Recent trends (as presented in the Budget 2011)

This year’s budget presented the actual financial performance in 2009-10, the provisional performance in 2010-11 and the targets for 2011-12 (Details can be accessed here). It also highlighted achievements on other metrics, including growth in traffic and augmentation of infrastructure (See ‘Status of some key projects proposed in 2010-11).

On financials, 2009-10 was a bad year for Railways. Figures show a high Operating Ratio of 95.3%. Operating Ratio is a metric that compares operating expenses to revenues. A higher ratio indicates lower ability to generate surplus. The 2009-10 Operating Ratio is the highest since 2002. According to the Railways Minister, this can be partly attributed to higher payout in salaries and pension due to implementation of Sixth Pay Commission recommendations.

Growth in passenger traffic remained high in 2010-11, at 11%. However, growth in freight traffic slowed down to 2%. Again, passenger fares remained untouched, but freight fares were increased.

Railways, in 2011-12, targets an increase of 8% in both passenger and freight traffic. Financials are expected to improve. An amount of Rs. 57,630 crore has been budgeted as net plan outlay for investment in infrastructure. Last year, this figure was Rs 41,426 crore.

In her opening remarks during the Budget speech in Parliament, the Minister commented that Railways forms an important backbone of any country. Lets hope it is headed in the right direction!