A K Bhattacharya: The sustainability of Lalu's magic

NEW DELHI DIARY

As Lalu Prasad achieved the distinction of presenting five consecutive railway budgets yesterday, it is now time to take a closer look at how he made a difference to the Indian Railways. Success does not take long to be recognised and appreciated. But it also gives rise to detractors who are quick to point out that the success being felicitated is not an unmixed blessing.

As far as Lalu Prasad is concerned, even his worst critic will admit that he has scripted a success story for the Indian Railways at a time most experts and economists had given it up almost as a basket case. And as expected, Lalu Prasad also had detractors who lost no opportunity to note that the smart recovery in the Indian Railways was on account of procedural changes and therefore was not sustainable beyond a point. There was some merit in that criticism. But that could not have belittled the new thinking that Lalu Prasad introduced in the way the Indian Railways was run in the last five years.

How was the Indian Railways run before Lalu Prasad took charge? The guiding principle was simple: Raise passenger fares and the freight rates to compensate for the rise in input costs. And since raising suburban passenger fares or the second class fares did not go down well with the people, raise only the upper class fares. Similarly, spare the freight rates for foodgrains or items that have an "aam admi" tinge to them and target petroleum products, steel and coal, instead "" never mind that the strategy had gradually brought down the railways' share in total freight moved within the country. In the 1990s, for instance, passenger fares and freight rates were raised every year. Its market share in freight had come down to 33 per cent by 2004, compared to 89 per cent in 1950.

In sharp contrast, Lalu Prasad's idea was that a cow must be milched fully if it were not to fall sick. Elaborating it further, he argued that the wagon was the Indian Railways' bread-earning horse. The wagon, therefore, must be loaded adequately. This basic idea was implemented by the Indian Railways in the last five years "" as the wagons' carrying capacity was raised and their turnaround time was reduced. Results showed in higher volumes of traffic, increasing market share and higher surpluses even though there was no across-the-board hike in freight rates.

How did that happen? The team under Lalu Prasad, which to the minister's credit was given full operational autonomy to implement an idea once that was approved, realised that the Railways suffered mainly because of their relatively high per unit cost of transportation. So, the strategy was to reduce the unit cost of transportation by improving freight volumes (load the horse adequately!). There were figures to back this thesis. In 2005, for instance, the marginal revenue for every incremental one million tonnes of freight was estimated at Rs 53 crore, while the marginal cost of carrying that incremental freight was only Rs 13 crore, leaving marginal net revenue of Rs 40 crore. The huge annual surpluses that Lalu Prasad has managed to show in the last few years (from Rs 7,000 crore in 2004-05 to Rs 24,000 crore this year) is primarily because of the successful implementation of this strategy. If the operating ratio (roughly the share of total expenses in total earnings) has come down to a little over 76, it is largely because of this strategy.

Questions about its sustainability have been rightly raised. Once the gains from this strategy are achieved, incremental growth will settle down to the earlier modest levels, it has been argued. But take a look at Lalu Prasad's latest initiatives and it will be clear that he cannot really be blamed for adopting a short-sighted strategy. He has already put in place an action plan to sustain the current growth levels. There is no let-up in his investment plans, even though he is conscious of lower growth in revenues because of an impending economic slowdown and his operating ratio would increase in view of an estimated Rs 6,000 crore hit his finances would take on account of the Sixth Pay Commission recommendations.

In 2006, he had decided to set targets for 2015, by when he had envisaged freight traffic to go up to 1,500 million tonnes, up from 600 million tonnes in 2004-05. That he is not very much off that target is evident from the fact that in 2007-08 he is on course to achieve the target of 790 million tonnes and is aiming at 850 million tonnes next year. He had also plans of increasing the speed of goods train from 24 to 60 kilometres per hour and reducing the net million tonne per kilometre cost from 53 paise to 35 paise. To achieve these goals, an investment outlay of Rs 350,000 crore had also been suggested to construct dedicated freight corridors, upgrade feeder routes, modernise assets and improve the railways' port connectivity.

Whether the Indian Railways' growth story is sustainable will depend on the ability of railway ministers of the next few years to mobilise these resources and ensure that these are used to create additional capacity in the system. There may not be any flaw in Lalu Prasad's basic strategy. The big question now is whether adequate investments will be made in the future to augment the Indian Railways' freight carrying capacity.

ashok.bhattacharya@bsmail.in