Sunday, March 8, 2015

The railways freight sector would be India's highest profit company if it was a standalone business

The Indian Railways recently released a White Paper to the parliament, and it made for an interesting read about the industry. The most fascinating aspect of the paper was the dichotomy between the freight and passenger business.

If the railways freight business was a stand-alone entity, it would have the highest profit among all listed companies in India (for FY2012-13) with Rs. 33 thousand crore in profit before tax, just ahead of ONGC. Yet, the profit made by the freight business has been largely offset by the losses in the passenger business, which is hemorrhaging money.

Looking at the railways estimates for cost vis-a-vis yield, the reason for this becomes clear. The freight business operates at an operating margin of 39%, while the passenger business operates at -103%, spending almost double of what it earns. The table below was copied from page 20 of the aforementioned white paper.

(PKM stands for Passenger Kilometers, while NTKM stands for Net Tonne Kilometers)

Benchmarking with global standards, India has one of the highest rates in the world for freight transport, while it's passengers fares seem unsustainably low, according to a World Bank presentation to a government committee (I would have liked to see Japan, Germany and the US represented in both categories, but could not find the corresponding data for them).

Clearly, this situation is unsustainable. The high cost of rail-freight (which, incidentally, was increased further in the recent rail budget), is one of the biggest reasons why the annual Net-Tonne Kilometers of freight transported per wagon in India is only 2.73 million, compared to 4.31 million in China and 5.52 million in Russia. The high cost of rail-freight also contributes (although it's not the only factor) to most freight being transported to roads through trucks, which cause significant traffic congestion on roads. At the same time, it contributes to high prices of food, fertilizer and other commodities across the country.

While the recent rail budget was rightly lauded for focusing on the right things (network decongestion and growth instead of newer trains), I was disappointed by the ministry's refusal to make hard choices. Freight-prices were increased instead of passenger prices in order to ensure that the railways was able to overcome operational costs. This was a populist move that was frequently adopted by the UPA government. While any part that sanctions an drastic increase in passenger prices will draw flak, gradual but consistent increases would help make it a more viable business.

At the same time, the government needs to curb pension spending in the railways. While this does seem like a cruel policy, the pension fund of the railways is exceptionally large. In 2014-15, the budgeted railways pension fund was more than the entire budgeted spending on Science and Technology in Union Budget 2015-16. The pension fund accounts for 18% of the entire railway expenditure.

The BJP government came in with a mandate for reform, and they have being doing a very good job so far. While increasing passenger fairs and reforming the railway pension system might be one political battle too many right now (especially in face of the controversy around the Land Acquisition Bill), this is something that I hope will appear on the roadmap over the next few years.


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