Railways' existential dilemma: Fare hike, rejig proposal spark fresh debate

A fare hike and restructuring proposal have raised afresh the debate over whether this state-owned transport utility is a service or a business

During his tenure as Union Railways Minister, Lalu Prasad used to refer to the freight business as “Railway ka kamau ghora” (or cash cow). A decade after his stint in Rail Bhavan, this descriptor still applies. The state-owned carrier charges passengers recovers a little under half its cost on passenger service — charging about 36 paise per 10 km and spending 73 paise — with the freight business making up the difference. 

This New Year’s Eve, the issue came into stark focus again when a rise in passenger fares prompted talk about restructuring the Railways, raising private sector participation and focusing on “corporatisation”.  But with a social service obligation of over Rs 35,000 crore — omitting staff welfare and law and order expenditures —the central question about the Railways has cropped up again: Is it a welfare service or a business?

“Social commitments are natural for any public sector organisation. But if the Railways needs more private participation, the management should also see it as a business,” said Prateek Kumar, an analyst with Antique Stock Broking. 

A former Railway Board member thinks the two can run on parallel tracks. “Look at it as an FMCG company where the shampoo business may be making losses but its soap business may be making profits. Treat the passenger and freight business the same way,” he said. The problem, however, does not resolve itself since the dependence on freight will remain. 

The dichotomy came to the fore after the Railway Board raised fares for passenger trains by 1 to 4 paisa across various classes on December 31, which will add Rs 2,300 crore to revenues, but excluded suburban and season tickets. “It is unfair to look at suburban trains as a business as we look at it as part of the transit-oriented development of our cities,” a senior railways official. On suburban rail, the Railways recovers just 40 per cent of its costs from passengers. 

The Railways’ social obligations are as complex as they are extensive. These obligations include concessions to various categories of passengers; in suburban fares to various classes of tickets, season ticket concessions; in goods services, carriage of essential commodities at concessional rates. In addition, it continues to operate many uneconomic branch lines such as those in border areas and routes with a lower freight share.  

All of this is reflected in the Railways’ operating ratio (OR), or the money spent to earn each rupee (the lower the ratio, the healthier the utility). An ideal OR is 88. In December, the Comptroller and Auditor General said the Railways had recorded its worst OR in a decade at 98.44 in 2017-18 (it improved a tad in 2018-19 to 97.29 in 2018-19).  But till September of the current financial year, the OR was as high as 121 per cent prompting Railway Minister Piyush Goyal said social obligations should not be part of calculating the OR but should be considered separately as a part for the budgetary support to the Railways. 

Subsidised fares are only one aspect of the financial impositions on the Railways. Recently, V K Yadav, Railway board chairman, pointed to the alarming fact that the organisation has over 1.3 million pensioners, more than its current employee base of 1.2 million employees. He, too, urged the finance ministries to take over these financial liabilities, which would improve the OR to 70 per cent. “Anything outside suburban passengers and strategic routes should be treated as a business. The extra money that can be used for infrastructure development is going nowhere because of this,” said a former board member. 

In its India 2020 report published last week, the International Energy Agency focused on the criticality of enhancing the role of the railways for India in 2050. It, too, has recommended phasing out the cross-subsidisation scheme to boost competitiveness. 

This decision lies in the realm of politics. Old timers in the national transporter blame a 12-year no-fare hike period between 2002-03 and 2014 as the prime reason for the deterioration in Railway finances. In between, Lalu cut fares in 2009 and in 2012, Mamata Banerjee forced her party colleague Railway Minister Dinesh Trivedi to roll back a fare hike (he resigned). 

Railways officials say the inter-departmental difference of opinion has also halted proposals to rationalise fare hikes. That is a key reason there is general approval for the recent decision to restructure the Railway Board by downsizing its strength and merging its eight cadres into a single Railway management service and corporatising production units. 

How far this restructuring will streamline Railway operations on more commercial lines is an open question. Either way, the pressures to do so are becoming more acute because of an asymmetry in the transport business. First, the Railways relies on its freight business to cross-subsidise passenger fares, but the freight business has been steadily losing share to the private sector road transport business. At the very least, for a major public utility to rely on a shrinking market is surely bad business.