Diesel dual pricing may hit Railways’ turnaround strategy

Just when the Indian Railways appeared to have given itself a shot in the arm by raising passenger fares across the board after a gap of almost a decade, it suffered a setback through the sharp hike in diesel prices for bulk consumers. The latter is likely to take away a significant part of the additional revenue that will be earned through higher fares. Though the diesel price hike was, of course, necessary, the problem is that it has not been applied to all consumers; dual pricing means that truck operators will be able to access subsidised diesel at the pump. The Railways will thereby end up buying diesel at a 20 per cent higher rate. Although rail transport is a far more cost-efficient and environmentally friendly method of haulage, the Railways has been losing market share to road transport steadily over time. Now, this additional cost disadvantage will make it difficult to hold on to whatever it has, not to speak of clawing back lost ground.

This setback to finances shortly before the Railway Budget will make it all the more difficult for the Railways to script a turnaround strategy. This is because the other major avenue for raising resources, hiking freight rates, is virtually closed. Freight rates have gone up to a point where any further rise will be resisted by customers and accentuate the loss in market share. Hope of financial recovery, thus, theoretically hinges on two measures. One is through cutting costs. This is difficult because there is no flexibility in outgo under heads such as salaries and pensions, dividend and fuel costs. Though there is always scope to cut wasteful expenditure, for a public sector organisation to do so under current governance realities is unlikely.

Significant additional revenue can be earned by carrying more freight tonnage. This may be partly facilitated by the expected recovery in the economy, which will raise freight offerings. But there is a catch here. Recently, the Railways has followed a flawed pattern for placing orders for new wagons — so that if there is actually more freight to carry, then the Railways may find itself in the invidious position of running into a wagon shortage. Under the circumstance, the only hope for earning more revenue in the coming financial year is by getting more out of existing capacity. The Indian Railways has over the years achieved substantial improvement in the utilisation of rolling stock and other infrastructure. The scope for this is critically dependent on balancing investment in areas such as signalling and goods yards; and commercially attractive new lines, even if short, which improve port connectivity. But it is precisely expenditure heads that affect capacity and safety, like depreciation reserve fund (track renewal), capital fund and development fund, which have experienced cuts in the current financial year. While the Indian Railways must improve existing capacity use and invest more to enhance its ability to carry more freight-earning goods, the government should also move fast on diesel price reforms and eliminate subsidies on retail prices, in order to allow the Railways a level playing field.

http://www.business-standard.com/article/opinion/invest-more-in-rail-113020600060_1.html

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