Sunil Jain: Happy not to be at IIM (A)

RATIONAL EXPECTATIONS

Whether the country's populace was aware of the turnaround in the Indian Railways' fortunes under Lalu Prasad is an open question, but now thanks to the efforts of Prof. G Raghuram at the Indian Institute of Management, Ahmedabad, this is no longer in doubt. After he prepared a case study on this, and invited Lalu to lecture students, newspapers across the country had pictures and stories of this, including Lalu's famous comparison of the Railways with his cow at home """if you don't milk it fully, it will get sick."

Sadly though, the case study by India's top management school is a lot less incisive than one would have hoped. While it details Lalu's contribution in terms of increasing the loading allowed in railway wagons, it ignores the major problems the railways face and blithely talks of how the sustainability of the turnaround depends on the political leadership""and this, we've just been told, is to run the Railways the way Lalu has. The study does not even look at Lalu's role in perspective""as my colleague Subir Roy pointed out in his column last week, the "operating ratio" (the share of revenue that's consumed by operating expenses), which had begun to improve since 2002-03, is still worse under Lalu than it was under CK Jaffer Sharief and Ram Vilas Paswan in the mid-90s.

Indeed, the larger study by Prof. Raghuram (the co-authored case study is a detailed analysis of a section of this) begins by talking of how, as compared to a planned investment of Rs 60,000 crore in the 10th Plan period (2002-07), the stupendous turnaround under Lalu has resulted in a situation where the Railways are now looking at investments of Rs 350,000 crore over the next eight years! Well, what is one to make of the figures put out by Lalu himself in his budget""after a stunning increase of 18 per cent in freight collections in 2005-06, Lalu is budgeting for a hike of just 10.7 per cent this year!

But perhaps I'm being too harsh. After all, the last of the suggested questions at the end of the case study is about whether what we've seen is really a turnaround and, if it is, how sustainable it is. That is, the good professor wants students to do some research themselves.

So what caused the turnaround? Is it sustainable? And, is the country paying a heavy price for this? What caused the turnaround is well-known. It was Lalu's decision to allow the Railway Board to increase the loading of wagons by around 10 tonnes""while perfectly safe, this 18 per cent hike in freight- carrying capacity is what really helped Lalu. Had freight earnings in 2005-06 also risen by just the 11.4 per cent they rose in 2004-05, the operating ratio for 2005-06 would have been 86.8 per cent, as compared to the much-better 83.7 reported. Interestingly, the IIM (A) study points out that, even with the higher freight earnings, had Lalu not shifted some expenditures to another head in the last budget, the operating ratio for 2005-06 would have been 86.6 per cent instead of 83.7 per cent. This means the reduction in the operating ratio under Nitish Kumar's tenure (from March 2001 to May 2004) is higher than the reduction during Lalu's first two years""given that Lalu has projected a worsening of this ratio this year, the comparison isn't going to get any better!

Whether this is sustainable depends upon whether Lalu's cow can be milked any more. The reason why Lalu's back to a sober growth figure this year is that loading levels cannot be hiked anymore""while it is true most railway tracks can take up to axle loads of 25 tonnes, the Railways do not have wagons that are capable of this. It's true other countries like the US even go up to 40-tonne axle loads, and have much lighter wagons (this allows a greater load to be put on the wagon while the axle load on the track remains the same), but getting to achieve this is a long-term thing since it means changing over 500,000-odd wagons owned by the Railways and strengthening the track.

What of the cost the country is paying for this turnaround? Since the Railways lose heavily on passenger traffic (the ratio of passenger tariff to freight tariff in India is 0.33 in comparison with 1.3 for China, 3.07 for Germany and 11.06 for the US), they make this up by overcharging on freight (on average, our rates are twice that of China, and productivity a third). In the case of coal, for instance, the Railways charged Rs 13,134 crore as freight in 2004-05 on a total of Rs 30,660 crore of coal produced by Coal India, making this one of the most expensive forms of freight anywhere in the world. Indeed, the IIM(A) paper brings out another interesting point, that while the Railways claim to have reduced freight rates, the rates for iron ore rose 55 per cent last year. Put another way, you could argue that if the Railways didn't overcharge on freight, Coal India would be a healthy company, and Indian coal would actually be economic to use.

If you're a monopolist and can hike tariffs at will, and the economy's growing fast enough to absorb the cost hike, the turnaround's hardly that stupendous anymore. Certainly not enough to get India's premier management institution so excited.