It's ironic that Shri Suresh Prabhu, Minister for Railways, has been rated as one of the top five performing ministers of the Modi Cabinet by a popular TV channel. This at a time when the Railways is grappling with its worst ever existential crisis. Budget targets have turned out to be nothing more than building castles in the air. The entire budgetary exercise, which always enjoyed high credibility, has become a bit of a joke. In the year 2015/16, it missed gross traffic earnings (GTR) targets by a whopping Rs 20,000 crore. In fact, GTR grew by a mere 4 per cent as against budget estimate of 17 per cent, and Indian Railways barely managed to meet its operating expenses and make payment of leasing charges and dividend to the government. Provisions for Depreciation Reserve Fund (DRF) and Development Fund had to be reduced substantially.
Slippages of last year, though, will pale into insignificance this year because in this years. Budget it has not only overestimated earnings but also understated expenses. Without any increase in passenger or freight rates, it is targeting a growth rate of 13 per cent in GTR. In the first two months of the current financial year, GTR has registered a negative growth of 8.2 per cent over the corresponding months of 2015/16. Freight earnings, the bread and butter business of Railways, have recorded a degrowth of an unprecedented 13 per cent during the same period. Furthermore, it has grossly underprovided for DRF and 7th Pay Commission payments including arrears. A provision of Rs 3,200 crore for DRF has been made on a residual basis, rather than on the basis of actual requirements of nearly Rs 20,000 crore. On the basis of current indications, reflecting negative growth in GTR, it would be safe to project that after the implementation of 7th Pay Commission recommendations, Railways would report operating cash loss (EBITDA loss in corporate parlance) in the current financial year.
In July 2001, Dr. Rakesh Mohan Committee had predicted that 'Business As Usual Low Growth' of 23 per cent would rapidly drive Railways into a fatal bankruptcy. But now even Hindu rate of growth of 23 per cent has become a distant dream for Railways. For the past five years, its freight volumes are stagnating and the same at 655 BTKMs (billion tonne kilometres) in 2015/16 are lower than the figures in 2011/12 by 2 per cent. It recorded negative growth of nearly 3-4 per cent in both freight and passenger volumes last year. The trend of falling volumes continues unabated even in the first two months of the current financial year. The end of the commodities boom has resulted in a substantial fall in traffic volumes of heavy commodities such as iron ore, manganese ore, etc. But key reasons for falling volumes are neither cyclical downturn nor capacity constraints, but are far more fundamental and structural in nature. The single most important reason is the deteriorating competitive strength of Railways in a fiercely competitive transportation business. Railways mindlessly increased passenger and freight rates across the board by over 65 per cent over the past five years even in segments where it is continuously losing market share. These segments are finished products like POL, cement, steel, fertilizer and containers of freight business and all AC classes of passenger business. The second significant reason for negative growth in freight volumes is the falling lead of bulk commodities such as coal, food grains, fertilizer, etc. All these factors appear to be irreversible in the near future. Hence, Railways has no option but to attract nonbulk traffic by offering superior value, in terms of quality and price, to the customers.
Of late, Railways has been on a borrowing spree. Its total outstanding debt including Capital at Charge (which is loan in perpetuity) would be around Rs 4 lakh crore on March 31, 2017. The decision to further increase financial leverage by signing MOUs for borrowings of $40 billion from institutions like LIC and JICA, that too for unremunerative and cash guzzling projects like bullet trains' is likely to prove to be suicidal, particularly at a time when the Railways is likely to report operating cash loss in the current fiscal year. No lessons seem to have been learnt by Railways either from the Lehman crisis in the US or the current bank NPA crisis triggered by excessive financial leverage.
Overall, all vital operating parameters of Railways are flashing red, and it is sinking deeper and deeper into a financial morass and terminal debt trap. But the Railways, particularly the Minister, is still busy managing the headlines and posting selfies on Twitter. There is lack of direction and focus on core operating performance. The writing on the wall is clear and time is fast running out. If prompt corrective actions are not taken, the situation may spiral out of control after the implementation of the 7th Pay Commission Report, and Railways may, for the first time, default in payment of dividend and debt servicing. It will be a tragedy of unimaginable proportions and a huge betrayal of the historic mandate. The wheels of the economy will stop cranking, and millions of poor and aspiring migrant labour will lose their only affordable means of transport if the lifeline of the nation is allowed to wither away like MTNL and Air India.
The challenge before the political leadership of the country today is to meet the aspirations of an energetic new India and, at the same time, take care of poor who are no less energetic. This formidable challenge can't be overcome by rolling out capex figures of Rs 1.5 lakh crore annually nor by making high sounding shallow claims about transformation of Railways in TV studios. For success of inclusive reforms, Railways, on the other hand, has to think anew and seek new pathways. Variables like the very nature of the railways business, cost structures, revenue streams, competitive strengths, relative elasticity of price and nonprice factors, their variability and sensitivity to load and length of train have to be revisited.
Such analysis would show that about 80 per cent of the railways' revenue streams as well as investments are not politically sensitive and can be market driven. It would also reveal that Railways, like any other transporter, is now operating in a competitive marketplace where it enjoys an edge in some profitable segments (like heavy bulk commodities and second class passenger business) and not in others (like finished products such as POL, cement, steel and all AC classes). This erosion of competitiveness is unlikely to be solved by regulation; instead, it requires offering a superior and compelling value to the customers.
Similarly, a deep analysis of the total cost function of the Railways would show that its variability is negligible in the short term. The profitability of a train is a function of several variables including price and non-price variables such as occupancy rates, carrying capacity, load and length per train. Thus, the focus has to shift from pricing per passenger/tonne to maximising profits through yield and margins per train.
Like in the past, it can again come out of this crisis by implementing numerator focused and scale-driven strategy: 'play on volumes, reduce unit cost, reduce prices, gain margins and market share and earn billions of dollars in profits'. The whole supply side strategy can be encapsulated in just three words, 'faster, heavier and longer trains'. The whole demand-side strategy can be summed up in another three words: 'dynamic, differential and marketdriven'. Uniform pricing across commodities, classes, seasons, routes and traffic flows has to be substituted with a differential and dynamic pricing policy.
It has to be translated into action through five critical management strategies: setting stretched targets, leveraging resources to optimise existing assets, working through cross-functional teams, fostering alliances, adopting a deliberative and calibrated approach and chasing projects to swift completion. Railways should utilise its scarce resources strategically by adopting a systems-based approach, to optimise utilisation of existing assets. Innovation and asset optimisation, as opposed to asset accumulation, are central to such an investment strategy. So are 'low cost, short gestation, rapid payback and high returns' investments. Execution Mantra is best summed up in the words of Peter Drucker: "Great people do not do great things. They identify simple and obvious things and execute them swiftly and brilliantly."
Lalu Prasad is former railways minister. Sudhir Kumar was OSD to Prasad during his stint in the railways ministry