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A seasonal railway freight hike of 15 per cent across commodities, may give the Indian Railways some room to cover up its immediate financial losses, but it could do more harm than help in the long run.
There is little mathematics behind such decisions, said a former railway official, who asked not to be named. "If you ask me a mathematical relationship of inflation and freight hike, let me tell you these rates are simply hiked on the basis of budgetary targets. So, the railways simply raises the rate that they need to reach their revenue targets."
The long-term impact of these hikes create a vicious adverse financial impact on the Indian Railways. "Their loading targets will get affected as more traffic would move to the road sector because of higher prices. Besides, the railways would itself incur higher expenses for their purchase and contractual work," said R Sivadasan, former railway financial commissioner. It is estimated that the railways purchases commodities and undertakes contractual work of about Rs 30,000-40,000 crore each year.
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The busy season surcharge would be applicable from October 1 to June 30 next year. The growth in railway freight volume had already halved to four per cent in 2012-13. Though the railways carried 40.05 million tonnes (mt) more compared with the previous year, it still fell short of the budget target by 15 mt in 2012-13.
Although it saw a rise of 22 per cent in revenue in 2012-13, this could not be sustained for the first quarter this year. The freight revenue grew a mere eight per cent in April-June 2013.
These figures indicate a spur in the revenue growth does not guarantee a long-term performance betterment.
"Although the bulk commodities like coal may remain with the the railways, commodities like cement and foodgrains would make an increased gradual shift to the roads," said an official.
Industry insiders carrying freight through the railways and senior officials agree that increased freight rates are a hidden factor that directly contributes to inflation, which in turn affects the freight rates.
"If you look at it from a long-term perspective, freight rate hike leads to higher electricity tariffs and increased cost of transportation, which contribute to higher cost of commodities and, hence, inflation. Further, this inflation contributes to higher freight rates each year. It's a vicious cycle of bad economics that Indian Railways is caught into," says Abhaya Agarwal, partner, infrastructure and PPP, E&Y.
The railways has its own side of the story. Officials indicate inflation and hike in dearness allowance by 10 per cent of central government employees from July 1 this year contributed to this massive seasonal hike.
The seasonal hike last year varied between 10 to 12 per cent depending on the commodity.
A railway official justified the levy of surcharge saying the monthly increase in diesel price and higher power tariffs were not being incorporated into the freight tariffs through the fuel adjustment component. "During this peak time, there is an extreme strain on the railway infrastructure and manpower. We have done a hike with a reasonable relation to the input cost."
