Pre Lalu Era Of Indian Railways Economics Essay
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Indian Railways (IR) plays a big role in India's socio-political development. In addition to transporting people and goods across the country, it has played a big role in times of natural and man-made disasters.
With accelerating pace of the growth of the Indian economy, the role of the railways has become even more crucial to the development of the country. The need for an efficient and effective transportation sector would become more crucial with every passing year. Thus it's necessary for the Railways to remain competitive, in terms of both cost and quality of services, to ensure an efficiently functioning transport sector in the country.
Railways form part of the India's basic infrastructure. All infrastructure services can be broadly classified into the following two categories
Open Access Services : A kind of services from which people cannot be easily excluded, irrespective of whether they have paid for the creation and maintenance of the service or not. Some examples of this service include public lighting, intra city roads etc.
Limited Access Services: These services are those which can be provided exclusively on a user pays basis and those who don't pay can be excluded from enjoying the benefits of this service. These can be termed as self-financing services. Railways ideally would fall in this category, as it would not be too difficult a task to prevent somebody who has not paid for the service from enjoying its benefits.
The Role of Quality Services in IR can be best explained by Vision 2020: a 12-point Rail Business Charter which was formulated by the then Minister of Railways, Mamata Banerjee. It addresses an urgent need to look at service levels and technologies that seem dreamlike and unattainable today. To improve the quality of services like many public railways worldwide, IR is considering how it may utilise the skills and capital of the private sector to deliver development programs and to increase the contribution of the public railways system to the future transport needs and economic development of the country.
History of Indian Railways
Indian Railways with the course length of approximately 63,000km is the world's fourth major railway system. The core of the pressure for building railways in India came from London in 1840s. For a century thereafter the basic policies and ultimate management of the Indian Railways were issued from London. The British built railways in India in order to intermesh the economies of the two countries. The building of railways in India brought about unintended as well as hoped for consequences in economic, political and military front. The new railways tied the different parts of India together more closely than ever before.
Some mention should be made of the role of Indian businessmen played in the early years. There were Indian merchants, both in Calcutta and Bombay who took an interest in founding of the railways. The most prominent of these was a remarkable Bengali merchant Prince Dwarkanath Tagore, grandfather of Nobel laureate poet Rabindranath Tagore. Dwarkanath's firm Carr, Tagore & Company is reported to have offered in 1844, to raise one-third of the capital required for a railway from Calcutta northwest to the coalfields above Burdwan. After Dwarkanath's premature death a few tears later the other Indian businessmen played only a passive role. The conception, promotion and launching of India's railways were all British.
The Railway Age dawned in India on 16th. April 1853, when the first train ran from Bombay to Thane, a distance of 21 miles(33.81 Km.) For some years before that the idea of building railways in India had taken concrete shape with the Court of Directors of the East India Company in London. The East India Company had obtained a foothold in India as a trading company, but gradually lost most of its privileges it had enjoyed as an instrument of commerce. It had, however been made responsible for the governance of India under the supervision of a Court of Directors in London. The final authority lay, of course , with the British Cabinet, who acted on the advice of its special Board of control for Indian Affairs. There was a Governor General at Fort William in Calcutta, having superintending authority over the administration of India.
2.1 Pre-Lalu era of Indian railways
The Indian railways had its share of difficulties in the 1990s that affected its growth. There were concerns over the ability of the railways to provide competitive transport service. This was large in part due to the tradition of seeing railways as an essential public service, the usage of which is hard to deny even to those who can't afford to pay. It was declared to be heading towards bankruptcy as per the Expert group on Indian railways in 2001. The operating ratio had reached a peak of 98.3 in 2000-2001, thus reflecting a poor performance.
The key features of the failure of railways can be attributed to the following-
Lack of modernization
Inability to achieve enhanced capacity while not incurring additional capital expenditure
Loading and unloading- This was done only during the day time (10 hours a day on an average) and trains used to lie idle at customer sites overnight.
Train examination- This exercise used to take a lot of time, about 16 hours on an average. It was done every time a train came back to its base station, irrespective of the distance travelled in the interim.
Fixed price policy- IR followed a fixed price policy without taking into cognizance the demand scenario and competition.
2.2 Lalu era of Indian Railways
Lalu Prasad Yadav served as the Indian Railways Minister from 24 March 2004 - 22 May 2009. He is the man who is given the credit for the 'turnaround' of the Indian Railways. When he took over, the Indian Railways was a loss-making organization. Under his leadership, it made a cumulative total profit of Rs. 25,000 crores (US $5.2 billion). The Indian Railways did transform from near bankruptcy to post an Rs 25,000-crore annual cash surplus in 2008. Considering that the railways is one of the world's largest state-owned enterprises with around 1.4 million employees, over 63,000 km of network that operate 14,000 trains every day, this was indeed a phenomenal achievement. One also has to take into account that it was achieved in just four years - between 2005 and 2008. Lalu is said to have remarked: "My mother always told me not to handle a buffalo by its tail, but always catch it by its horns. And I have used that lesson in everything in my life, including the railways."
Following are the key strategies adopted during his tenure-
Downsizing- The basic idea was to trim off excess staff. The number of employees which was hovering around 1.652 million in 1991 was brought down to 1.472 by 2003.
Outsourcing- Outsourcing through public private partnership was adopted, not just for catering and parcel service activity but for advertising too.
Product innovation - The IR introduced double stack container trains on some diesel routes. These containers increased the carrying capacity of each train to 2,500 tonnes against 1,500 tonnes, and also reduced line capacity constraint by nearly half. The effect of these measures can be seen in higher freight revenue.
Refused to hike prices
Checked for vacancy- Upgraded tickets if seats were going vacant in the upper class. So, waitlisted passengers could be allotted seats.
Increased load carried by goods wagon from 81 tonnes to 90 tonnes. This led to an additional earnings of 7200 crore.
2.3 Post Lalu Scenario:
Dinesh Trivedi served the Indian Railways from 13 July 2011 - 18 March 2012. The main criticism against him stems from the fact that he increased the ticket prices. On 14 March 2012, Trivedi announced the annual rail budget 2012 that included an all over hike in passenger fares, ranging from 2 paise to 30 paise per kilometre for reasons of safety along with network expansion and modernisation. He has also said that the ministry is also open to the idea of privatization, which would allow more funds to be allocated to help the system cope with capacity. He stepped down as the Railway Minister on 18 March, 2012, a couple of days after presenting his first ever Railway Budget in which he increased passenger fare.
Following is a list of price rise in fares-
Second Class Trains: 2 paise per km
Express Trains: 3 paise per km
Sleeper Class: 5 paise per km
A/C III Tier And First Class: 10 paise per km
A/C II Tier: 15 paise per km
A/c I Tier: 30 paise per km
Platform tickets: Rs 3 to Rs 5
2.4 IR Financials
Graphs:
Operating Ratio
Operating ratio is the ratio of cost / expenses incurred in rendering a service to the sale of that service for an industry the acceptable operating ratio would be 70%-75% in the case of Indian railways the expenses and revenue increase every year but operating ratio will speak on the optimum utilization of the capacity by the service provider in the case of Indian railway from 2002-2006 there is an improvement in the operating ratio which is a sign of its profit making ability during these years.
The lowering of value signifies better signs for the IR. It means IR has more ability to generate profit if revenues decrease. It also means Lalu's entry in 2005 made a great difference in reducing ratio from 90 in 2004-05 to almost 80 in 2005-06.
Fig 1. Operating Ratio
Growths Observed in Transportation of Goods
The key concern here is the No. of tons carried and the net ton kilometer which are the reasons for the increase in the revenue in Indian railways , we can see from the given data that the revenue during the year 2006 was at peak as a result of increase in the No. of tons carried and the net ton kilometer were highest over the years, but there is an decline in revenue during the year 2003-04 in spite of increase in the above parameters which is due to expansion in the capacity.
Under Lalu's supervision, Earnings were increased from 30778cr to 36287cr showcasing a record growth of almost 18% y-o-y; Tons growth of ~11% and Net Tonne Kilometer growth of ~9% was seen
Fig 2. Growth Observed in Transportation of Goods
Growths Observed in Transportation of Passengers
The passengers revenue depends upon the number of passengers travelling and the distance travelled by the passenger with the price Indian railways has seen an continues growth distance travelled by the passenger which is due to the reach of the Indian railways and extension of its services which are key reasons for the increase in the revenue generated by railways during these years.
Only under Lalu's supervision, Passenger kilometer growth reached to double digits i.e almost 10% in 2005-06.
Fig.3 Growths Observed in Transportation of Passengers
Revenue vs Expenses
MAJOR REFORMS BY LALU PRASAD YADAV:
3.1 Increased Occupancy in Passenger Trains
"We have broken the myth that whenever any government organisation runs into losses that you privatise it and retrench the manpower … My belief is that if we have honesty, vision and commitment to the organisation, there is no possibility of any institution and corporation running into losses."-------Lalu Prasad Yadav
It was a matter of surprise that Indian Railways during tenure of lalu Prasad yadav the then railway minister generated a cash surplus of approximately 13,000 crore rupees in a small duration of 30 months , a fund balance of Rs. 16,000 crore and an operating ratio of less than 80% without privatization, retrenchment and raising of passenger fares. This growth figure took a quantum jump up to Rs. 20,000 crore.
If we talk about revenue by passenger business the era of nineties was marked with hike of 3% to 4% and the freight segment at 2 to 3 per cent, while during lalu ji's tenure the first six months were marked with a hike of 13% in passenger business even after reducing in fares in all the classes. During that period earnings from coaches had increased by 46 per cent even after a offered discount of 50 to 75 per cent in the parcel rates in the unpopular passenger trains.
If we look back we will find that lalu's government followed some discounts like :
Tickets costing less than Rs50 get a Re 1 discount;
Tickets above Rs50 get a 5% cut.
AC First Class fares were down 7% and AC-II down 4%.
Discounts on popular trains and busy season were made half of normal. Prasad announced the introduction of 10 new Garib Raths and 53 pairs of trains.
He also increased the service frequency of 11 trains and extended 16 trains to new destinations.
The basic strategy was based on volume. This caused output to automatically increase threefold. Capacity of long distances trains were increased it is estimated that long distance trains were burdened by 2000 passengers instead of 800 before. By this unit cost fell down by 45%. Prasad named it as maximum utilization of assets.
In 2004 there was abrupt downfall in airfare from upper class passenger segment. Two queens of railways RAJDHANI AND SHATABADI were likely to hit by this but Contrary to the expectations, the RAJDHANI AND SHATABDI expresses showed healthy growth in their earnings as well as passenger numbers. The Rajdhani trains, which connect New Delhi to various state capitals, showed earnings hike of 8.6% in year 2004 accompanied by 9.4% increase in number of passengers ferried. Overall, passenger earnings of railway grew by 14% (5.6% better than estimated growth).
3.2 Revenue Generation
Performance in 05-06 over 04-05
A 6% ( 643 million ) increase in number of passengers coupled with a 0.4% increase in average rate per PKm ( due to increase of the average lead in AC I class and AC III tier travel) helped passenger earnings increase by 7% ( 72 Crs).
There was a significant increase in number of passengers traveling by AC 3 Tier (24%, 4 million) and Others (21% , 3 million). AC II tier travel also registered an increase of 18% (2 million). The additional revenue on account of the above were Rs.228 Crs. (AC 3Tier), 76 Crs.(Others) and 178 Crs. (AC 2Tier).
Ordinary II Class/Sleeper travel registered an increase of 9% (138 million), which contributed 255 Crs.
Even though, there was no increase in passenger fares, there was a slight increase in the average earnings from 24.52 ps. to 24.62 ps. due to increase in no. of passengers and average lead in AC I Class and AC 3 Tier.
Performance in 06-07 over 05-06.
An increase of 10% (582 million) in no. of passengers and 1% increase in average lead is likely to fetch an additional revenue of 1670 Crs. (11%).
Average leads are expected to increase in AC I Class and Others by 11% & 18% respectively.
A reduction in AC I and AC 2Tier fares will be offset by an increase in average .lead and no. of passengers as result of which, the earnings in both these classes are expected to register an increase of 11% .
An overall increase of 10% (63 million) in no. of passengers traveling by both Mail Express II and Sleeper Classes is likely to fetch additional revenue of 765 Crs. (11%). Similarly, a 10% increase in Ordinary II Class / Sleeper (170 million passengers) will fetch an additional 362 Crs.).
Suburban traffic is also expected to increase by 10% resulting in additional earnings of 158 Crs.
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Revenue Analysis of Lalu ji's Tenure (Data in crore)
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2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
Freight Earnings
30778
36287
41716
47435
53434
Y-o-Y Growth
11.44%
17.90%
14.96%
13.71%
12.65%
Passenger Earnings
14113
15126
17225
19844
21931
Y-o-Y Growth
6.12%
7.18%
13.88%
15.20%
10.52%
Operating Ratio
91
83.2
78.7
75.9
90.5
Fig 1 Revenue Analysis
Fig 2 Freight Earnings (% Y-o-Y Growth)
Fig 3 Passenger Earnings (% Y-o-Y Growth)
Fig 4 Operating Ratio
3.3 Making a Better Service Scape and Increasing Customer Experience
Being an extremely populated country and having excess of mismanagement Mr. Lalu Prasad Yadav tried his best to provide best services to railway's customer. A total of approx 14000 plus coaches were there at the end of 2009 in comparison to 2623 in year 2004. He also stressed on railways hygiene he in order to increase service experience implemented many passenger amenities, with a stress on discharge-free green toilets in all 36,000 coaches at a cost Rs4, 000 crore.
Year on Year total Coaches introduced
Year
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
Total
*Source: White paper of Indian railway
Various small things were corrected which adds a value in customer experiences it includes Increasing the height of a number of platforms, providing platform shelters, construction of foot over bridges, arrangement of multi-level parking, & facilities of lifts and escalators at important stations. His master stroke for poor was GARIB RATH where number of poor people experienced the comfort of air-conditioned travel in GARIB RATHS by spending a little more than non-AC sleeper fares.
Passengers Amenities and Services
After revenue department he gave priority to service department. Steps were taken to improve and offer higher level of passenger facilities at major stations. He introduced a concept of development of model and modern stations. All 'A' and 'B' category stations were selected as model stations and out of the 594 such stations found, upgraded passenger amenities were provided to 373 stations. Out of 637 stations identified to be developed as modern stations, 426 stations were modernized. Number of PRS (passenger reservation system) was increased; UTS (unreserved ticketing system) locations and facility of internet ticketing were also provided to passengers.
Various initiatives were taken to improve supply chain management system for poor farmers a program was launched to provide adequate facilities for collection, storage, transportation and distribution of produces like fruits, vegetables, milk, food grains, etc., for farmers living in villages. Being a habitat of rural areas the poor farmers were deprived of reasonable price for their products and many a times fruits, vegetables, etc., get spoilt due to inefficient transportation system. Lalu ji introduced modern supply chain infrastructure to transport agricultural produce from the fields to the plate of the consumer. He granted permission to open outlets for selling agricultural goods at railway stations situated in cities, towns and villages. At these outlets, not only the agricultural goods of the farmers were allowed to sell but also seeds of developed varieties, fertilizers and other inputs were also made available. He provided vacant Railway land in large cities for development of the supply chain infrastructure. All these works was done under public private partnership schemes (PPP). He invited private parties to run refrigerated container trains under the new container policy for transporting agricultural products to every corner of the country. With implementation of this scheme, the farmers can get the right price for their crops and the consumers can also get good and fresh agricultural goods at reasonable prices. Along with this number of accidents were also decreased year on year which made a good image of railway in minds of customer regarding safety.
*Source: White paper of Indian railway
3.5 Safety Chart
*Source: White paper of Indian railway
3.6 FRIEGHT MANAGEMENT
Freight management is the important area of consideration behind the dramatic increase in revenues of IR over the years. IR has taken some key measures to boost its capacity utilization. Freight management consist of transportation of commodities or goods through which earnings are obtained. Bringing down freight fares has greatly benefited local industry. In a country where agriculture is the backbone of the economy, there is a huge role for Indian Railways in helping farmers directly connect with markets for their goods. The commodities that are transported thru IR include coal, iron ore, limestone, dolomite, stones, sugar, salt, non bulk goods, containers, cement, fertilizers, pig iron and finished steel. Coal is the most important commodity to be transported over the years by IR. Now, we will discuss some key measures below:
Dynamic Pricing Policy
To compete with the freight rates of road sector which changes its rates as per the demand-supply scenario and as per the season, IR adopted dynamic pricing strategy. As per the strategy, IR changes freight rates depending upon peak or non-peak season, busy or non-busy routes and premium or non-premium services. This has helped IR increase its revenue significantly.
Tariff Rationalization
The classification of items was reduced from over 4000 to a mere 28 groups of commodities. This helped in simplifying and rationalizing goods tariff. As a result, goods tariff, which was running into more than 500 pages earlier (the tariff tables), was condensed to a few pages. In 2005-06, the total number of classes in the freight tariff schedule was reduced from 27 to 19. The highest class - 250 for charging freight was lowered to 220 in 2006-07. Over the next three years the highest class is proposed to be below 200.
Non-peak Season Incremental Freight Discount Scheme
Usually, during the monsoon season, the demand for freight transportation dips from 1 July to 31 October. It was estimated that over 400 trains remain idle in this period due to lack of demand. Hence, during this period, freight rebate of 15% was offered for incremental freight revenues of over Rs. 5 Crore in a month and 10 % for incremental earning of less than Rs. 5 Crore.
Empty flow Direction Freight Discount Scheme
The truck rate is considerably higher than the rate for the return trip whereas the Railways charge the same rate in both directions. Therefore, it was noted that up to 40% of trains returned empty. As the marginal expenditure incurred in loading freight in the empty flow direction was low, heavy discounts of up to 30% were announced on the reverse flow direction to ensure high utilization of assets through the year.
Loyalty Discount Scheme
IR has announced a Loyalty Discount Scheme to encourage the transportation of cement, iron and steel by rail. Under this scheme, a discount of 1% in freight was offered during the non-peak season, if over 90% of the production of any steel or cement factory was transported by rail. The discount offered was 0.5% if the share of rail transportation was above 50% but less than 90% of the total production. This discount was applicable for the transportation of finished products only and not for transportation of raw materials or clinker used in these industries.
Terminal Incentive Engine-on-load Scheme
The Terminal Incentive cum Engine-on-load Scheme was formulated with a view to bring down the wagon turnaround time. Customers who fulfilled the conditions laid down in the scheme and invested in their terminals to bring down the loading and unloading time, qualified for 5% rebate in the first year. Over the next ten years the rebate would be given
at a diminishing rate and would be 1% from the fifth year onwards.
Multiple Unloading
Earlier, the Railways did not allow unloading multiple times along the way. But this policy was changed and cement companies were allowed to unload multiple times on the way (2-3 times instead of once) and also offered mini-rakes (half carrying capacity of normal wagon). This has made a big difference to the logistics cost and enhanced the Railways' value proposition.
Mini Rake and 2-point Rake Scheme
Under this scheme, mini-rakes and 2-point rakes were made available without any additional charge in the non-peak season and at a freight rates higher than block rake trains by 5% in the peak season.
Freight Forwarder Scheme
This scheme offered discounts for non-peak and round trip loading for smaller volumes. It was actually implemented to increase Railways share in the piecemeal traffic segment.
Reduction in Unit Cost
The unit cost of freight at constant prices has been going down on Indian Railways for the last many decades but recently it came down by 12 per cent at current prices as compared to 2001. In 1991 at the time of initiation of new economic policy, IR's share in cement and steel transportation was around 70 to 90 per cent, which came down to 30 to 35 per cent by 2003-04. For the first time in the first six months of 2006, IR's share in cement and steel transportation has increased by 6 to 8 per cent. The production of cement and steel increased by 8 to 10 per cent during April to September 2006 whereas the rail traffic for these commodities registered an increase of 35 to 40 per cent.
3.7 Indian Railways Commodity-Wise Freight Revenue for Apr-May 2012
Out of the total earnings of Rs. 7197 crore from commodity-wise freight traffic during the months of April-May 2012, Rs. 3195 crore came from transportation of 41.62 million tonnes of coal, followed by Rs. 680 crore from 9.59 million tonnes of iron ore for exports, steel plants and for other domestic user and Rs. 762 crore from 9.53 million tonnes of cement.
It also generated Rs. 475 crore from 3.33 million tonnes of foodgrains, Rs. 404 crore from 3.48 million tonnes of petroleum oil and lubricant (POL), Rs. 459 crore from 3.03 million tonnes of Pig iron and finished steel from steel plants and other points as well as Rs. 253 crore from 2.64 million tonnes of fertilizers.
Other sources of earnings included Rs. 118 crore from 1.26 million tonnes of raw material for steel plants except iron ore, Rs. 315 crore from 3.50 million tonnes by container service and Rs. 536 crore from 6.15 million tonnes of other goods.
Fig. 1 Commodity-Wise Freight Revenue (in cr)
Fig. 2 Percentage Contribution of each commodity in total revenue
SUGGESTIONS TO INDIAN RAILWAYS
Railways can consider the Public Private Partnership (PPP) option for projects like the dedicated freight corridor, commercial utilization of surplus railway land, and creating inland container depots and warehouses. Surplus railway land can be leased to some private players who can set up good traveller accommodations for genuine passengers who reserve their journey in advance for a comfortable stay for periods not exceeding one or two days. The rooms so provided shall be neat, clean and preferably with air conditioning or fans and with clean toilets. Star rated luxuries are not what the passengers need, but reasonable neatness, comforts, safety and affordability. There should be provisions for booking such accommodations in advance while the tickets are booked. This facility will surely help many long distant travellers. They can break their tiring train journey enroute to take a refreshing break in some other cities and towns and continue their journeys comfortably in other short distance trains.
Likewise, implemented by Delhi Metro, railways can think of creating separating passenger handling areas from commercial areas, like in airports.
Just like Airlines, Railways can think of implementing the "Registered Baggage Handling" facility for long distance travellers. Example: Say, A/c passengers travelling from Delhi to Hyderabad handing over their baggage to baggage handlers at Delhi and picking it at Mumbai baggage office. This will surely help in reducing the mad rush on railway platforms. They should also ensure availability of porters for carrying and loading luggage of the passengers and a facility to avail these services with advance booking.
