Bitter pill needed for economic health, says India Inc

Railways needs massive investments to remain on track

Corporate India has welcomed the steep rise in railway fares and cargo haulage rates, saying railway finances had reached a precarious position and it was time to bite the bullet on the issue.

“The railway fare hike is a good move, and we can now expect the railway budget to deal with operational issues and privatisation,” said Adi Godrej, chairman of the Godrej group.

CEOs said the 6.5 per cent rise in haulage rates will result in an increase in cement and coal transportation costs, which will ultimately be passed on to consumers like power and steel plants and infrastructure companies.

Harsh Goenka, Chairman, RPG Enterprises, said the rail fare hike was not a surprise as it was announced in May by the earlier government but put on hold due to elections. “Railways have been severely constrained on funds for priority areas like safety and security besides improving the service. They also need cash for upgrading the signalling system and tracks. Long pending railway projects like freight corridors may also now take off, if funds become available,” said Goenka.

Chairman of the Videocon group, Venugopal Dhoot, said the action on railway fares was on expected lines. “The decision on fare hikes should have been taken in previous budgets. Railway finances need some urgent action. Prime Minister Narendra Modi has talked about stern action to bring the economy back on the rails. Today’s bitter pill' will in the long run improve the financial health of the economy.”

Rajeev Talwar, executive director of DLF, said: “These things have to be done. If the previous government had raised fares by 3-5 per cent hike every year, the current government would not have gone in for this steep hike.”

CEOs feel the railways need to modernise, considering freight costs account for 13 per cent of India’s gross domestic product, versus around 5-7 per cent elsewhere in the world. The railways carry only 32 per cent of India's freight  while the global average is 70 per cent. A study conducted by Indian Railways shows that the share of rail transport needs to rise to 74 per cent from the current 32 per cent to optimise costs. This will result in 16 per cent savings in the total cost of transportation.

Venu Srinivasan, chairman and managing director, TVS Motors, says the increase in railway fares is a move in the right direction by the government.

"The government had no choice but to take fiscally correct decisions. It is a difficult decision to take but a right one. Diesel prices has been going up since the last three years and the government was left with no choice if it wants to avoid an empty treasury," Srinivasan adds.

Its not only finances, CEOs say the railways infrastructure is also crumbling. The average speed of railways in India is only 25 kilometer per hour. While traffic has tripled, its track length has risen only 2 per cent. The railways are also in big need of funds as just strengthening tracks and bridges will require an investment of Rs 33,000 crore, say Stanchart analysts.

Elaborating, they say Indian Railways has an extensive track network of 110,000 km and has approximately 131,000 bridges. While many railway bridges need urgent strengthening, the committee has identified 11,250 bridges of which 25 per cent of the bridges are more than 100 years old. In many places, tracks are so weak that they are not suitable for high-speed trains. At the same time, it is not feasible to strengthen the entire railway network.

"Given that road freight is at least twice as costly as rail freight, investment in rail infrastructure is an economic imperative – even a small increase in incremental investment will result in significant benefits," say analysts.

Take for example, an another estimated Rs 25,000 crore investment will be required to upgrade the signalling system. This would improve safety and lead to a 30 per cent increase in capacity and associated revenue potential. But with railway finances in precarious position, CEOs say it will be difficult for the railways to invest in new projects.

Chairman of Motilal Oswal Financial Services, Motilal Oswal says privatization of railways projects, units and setting up projects under public, private partnership (PPP) is a way out of the financing problem.