Friday, December 19, 2003
Indian Railways -- the mother of all free lunches?
I have always been a fan of the Indian Railway system. For the better part of 10 years before I left for New York, I travelled the length and breadth of India in those dilapidated trains. It was so much fun, it never occured to me to complain about the dilapidation, lack of punctuality etc. But in many ways, the Indian Railways is representative of all the problems that confront the booming economy. The Economist picks up on the idea in this wonderful special on the Indian Railways.
Most importantly, it does not make enough money to meet its investment needs. Its “operating ratio”—operating costs as a proportion of revenues—which had climbed close to 100% by the beginning of this century, has fallen to 92.5%. But that is still not enough to cover depreciation, maintenance and expansion. Nor can the railways rely on indefinite government bail-outs at a time when India's overall fiscal deficit (at more than 10% of GDP) risks becoming unsustainable. Yet the railway system has been losing customers to an improving road network, making it hard to see how its finances will ever improve.
Some history -- Earlier this year, India celebrated the 150th anniversary of its first train journey. On April 16th 1853, a locomotive pulling 14 carriages and 400 people left what was then Bombay to a 21-gun salute and trundled to Thane, 34km (21 miles) away. The journey took about 75 minutes.
From there, the network grew fast. Some of it was built by the British Raj, some by the princely states, such as Bikaner and Jodhpur, which retained their notional independence. Many of the network's main trunk routes were laid by private companies under schemes that would now be described as “build-operate-transfer”. Passenger numbers increased from 24m in 1901 to 42m in 1917. By 1922, almost 60,000km of track had been laid. In a controversy that would find echoes in contemporary India, the rail operators, which enjoyed a government-guaranteed minimum return, were suspected of exorbitant profit-gouging. In 1924, the entire system—its construction, operation and financing—was brought under the control of the British Indian government.
Today, Indian Railways is the largest organisation in the country, both in number of employees—more than 1.5m—and in capital invested, some $10 billion. It has 63,000km of routes, 7,700 locomotives and nearly 7,000 stations. It carries 1.4m tonnes of freight and 14m passengers every day—equivalent to moving all of India more than four times a year.
In fact, the Indian Railways is the largest employer in the world and that is definitely a sobriquet it should gladly hand over to Wal-Mart (1.1 million).
The story also quotes the recommendations of the Rakesh Mohan committee on what could be done to change things.
It means that Indian Railways should start divesting itself of “non-core” activities, such as catering and manufacturing; that it should cut staff numbers drastically; that its top management, a seven-member Railway Board, should shed its conflicting responsibilities as regulator, policymaker and boss; and that it should start producing intelligible accounts. Similarly, it should establish standard commercial criteria for its investments. But above all, it should stop using its freight customers to subsidise passenger fares.
Most importantly, it does not make enough money to meet its investment needs. Its “operating ratio”—operating costs as a proportion of revenues—which had climbed close to 100% by the beginning of this century, has fallen to 92.5%. But that is still not enough to cover depreciation, maintenance and expansion. Nor can the railways rely on indefinite government bail-outs at a time when India's overall fiscal deficit (at more than 10% of GDP) risks becoming unsustainable. Yet the railway system has been losing customers to an improving road network, making it hard to see how its finances will ever improve.
Some history -- Earlier this year, India celebrated the 150th anniversary of its first train journey. On April 16th 1853, a locomotive pulling 14 carriages and 400 people left what was then Bombay to a 21-gun salute and trundled to Thane, 34km (21 miles) away. The journey took about 75 minutes.
From there, the network grew fast. Some of it was built by the British Raj, some by the princely states, such as Bikaner and Jodhpur, which retained their notional independence. Many of the network's main trunk routes were laid by private companies under schemes that would now be described as “build-operate-transfer”. Passenger numbers increased from 24m in 1901 to 42m in 1917. By 1922, almost 60,000km of track had been laid. In a controversy that would find echoes in contemporary India, the rail operators, which enjoyed a government-guaranteed minimum return, were suspected of exorbitant profit-gouging. In 1924, the entire system—its construction, operation and financing—was brought under the control of the British Indian government.
Today, Indian Railways is the largest organisation in the country, both in number of employees—more than 1.5m—and in capital invested, some $10 billion. It has 63,000km of routes, 7,700 locomotives and nearly 7,000 stations. It carries 1.4m tonnes of freight and 14m passengers every day—equivalent to moving all of India more than four times a year.
In fact, the Indian Railways is the largest employer in the world and that is definitely a sobriquet it should gladly hand over to Wal-Mart (1.1 million).
The story also quotes the recommendations of the Rakesh Mohan committee on what could be done to change things.
It means that Indian Railways should start divesting itself of “non-core” activities, such as catering and manufacturing; that it should cut staff numbers drastically; that its top management, a seven-member Railway Board, should shed its conflicting responsibilities as regulator, policymaker and boss; and that it should start producing intelligible accounts. Similarly, it should establish standard commercial criteria for its investments. But above all, it should stop using its freight customers to subsidise passenger fares.
