Opinion: Railways needs to change track

Must adopt a new approach and present a framework for calibrating its institutional architecture

By Manish Narwade

Hyderabad: The Indian Railways has been the backbone of the country, carrying over 23 million passengers and transporting around three million tonnes of freight daily. However, the railways is criticised for its poor infrastructure and highly centralised-bureaucratic model.

There are many reasons for this pathetic state. One, many tracks were built by British colonisers. Some have been updated and some are still used with little upgradation which results in insufficient outputs in terms of speed and time. The allocation for capital expenditure for Indian Railways declined from 1.5% of GDP in 1950-51 to 0.2% in 2016-17 (Mishra, 2018). Two, due to being centralised and highly bureaucratic, the Railways faces delays in taking major decisions which hinders the implementation of new initiatives.

Three, its traditionally-determined freight and pricing policies make it less competitive compared with private players. The market share of private players in freight transport increased from 8% in 2009-10 to 36% in 2018-19. In the same period, freight earnings of Railways grew at a compound annual growth rate of (CAGR) of 4.4%, while the freight earnings of private players grew at a CAGR of 13.3%. Passenger traffic declined from 8.4 billion in 2014-15 to 8.1 billion in 2018-19, indicating a decline in customer satisfaction. Though the network of Railways is huge, connecting most tourist places, it has inadequate marketing strategies to attract customers.

Cross-subsidy

Cross-subsidy refers to the practice of using profits from one business segment to support another segment that may not be profitable on its own. In the case of Railways, cross-subsidy of the commercial arm would involve using profits from freight and other commercial services to subsidise passenger services, which are generally less profitable.

There are several benefits of cross-subsidy. It can help ensure essential services, such as passenger transportation, remain accessible and affordable even if they are not profitable on their own. It can also help balance the financial sustainability of different segments of the Railways and prevent the need for excessive government funding. However, there are also potential drawbacks. It can create inefficiencies and distortions in pricing, which can impact the overall competitiveness of the Railways. It can also lead to a lack of transparency and accountability in decision-making, as subsidies may be allocated without proper evaluation of their effectiveness.

The viability of cross-subsidy of the commercial arm of Railways depends on how it is implemented and managed. It requires careful consideration of various factors, including pricing structures, operational efficiency and the financial sustainability of different segments of the Railways.

Pricing Structure

The Railways should configure the relationship between the fare charged to passengers, freight and other commercial services in a way that optimises revenue while also balancing the needs of different types of customers. One way to achieve this could be through dynamic pricing, which involves adjusting fares based on demand and capacity. For example, during peak travel seasons or high-demand periods, fares for passengers could be higher, while freight rates could be lower during off-peak periods to incentivise more business. This would help maximise revenue and utilisation of resources.

Another strategy could be to offer package deals or discounts to customers who use multiple services, such as combining passenger and freight transportation or offering bundled services with other commercial partners. This would encourage more usage of services and help retain customers. The Railways could also consider introducing differential pricing based on the type of service or customer segment. For example, providing premium services with additional amenities for higher fare-paying passengers and also providing discounted services for certain categories of passengers, such as students or senior citizens. It is also essential to continually monitor and adjust pricing strategies based on market trends, customer behaviour and other factors.

The framework for calibrating the institutional architecture that may characterise the arrangement between the Railways and the emerging market imperatives can be through a regulatory framework. This regulatory framework must reflect the changing market dynamics and emerging market imperatives. This could involve reforms in areas such as pricing, competition policy, safety regulations and quality standards. The Railways needs to review its organisational structure to ensure that it is aligned with the emerging market imperatives. This could involve restructuring to improve efficiency and accountability and create separate business units to focus on different market segments.

Trains like Vande Bharat, Shatabdi, Tejas and Gatiman have come up with dynamic pricing schemes which are among premium sectors. The IRCTC is operating Tejas Express with all premium facilities. Even though some trains have opted for dynamic fare pricing, they are running at a huge loss. This is because a majority of people are left out. Tejas Express incurred a loss of around Rs 9 crore in 2021-22 while Vande Bharat, which is fully operated by the Railways, made a profit of Rs 70 crore in 2018-19. The difference is Tejas Express is operated by a private company, which has to pay a fee to Railways for using its infrastructure. This fee, along with other operating costs, makes it difficult for the private company to generate profits. Subsidising some costs to private players will help the private train run in profits.

The Garib Rath trains, which were introduced in 2005 with basic amenities, fewer stops and cost-effectiveness with dynamic fare pricing, too are making a profit. This is because the Garib Rath has attracted the middle class and upper middle class who find it affordable, while trains like Tejas majorly target the upper middle and rich class.
The Debroy Committee also suggests the restructuring of Railways to create separate entities for infrastructure and rolling stocks to improve efficiency and accountability. Investing big in modern technology such as GPS and digital platforms to improve operational efficiency and enhance customer experience besides innovation will ensure it remains competitive.

Public-Private Partnerships

The private sector has invested Rs 9,000 crore in railway projects under the public-private partnership mode between 2000 and 2020, which is a welcome move. The Railways need to focus on skill development to build a workforce in sync with the emerging market. This could involve training and upskilling existing employees and recruiting new talent with specialised skills. The number of employees in the Railways declined from 1.4 million in 2014 to 1.2 million in 2019, indicating a shortage of skilled workers.

The Railways’ business-as-usual approach may not be sustainable in the face of emerging market imperatives. It needs to adopt a new approach and present a framework for calibrating its institutional architecture.