View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics INDIAN INSTITUTE OF MANAGEMENT AHMEDABAD y INDIA Research and Publications Indian Railways in the Past Twenty Years Issues, Performance and Challenges G. Raghuram Rachna Gangwar W.P. No. 2008-07-05 July 2008 The main objective of the working paper series of the IIMA is to help faculty members, research staff and doctoral students to speedily share their research findings with professional colleagues and test their research findings at the pre-publication stage. IIMA is committed to maintain academic freedom. The opinion(s), view(s) and conclusion(s) expressed in the working paper are those of the authors and not that of IIMA. INDIAN INSTITUTE OF MANAGEMENT AHMEDABAD-380 015 INDIA IIMA y INDIA Research and Publications Abstract Indian Railways (IR) is Asia’s largest and world’s second largest network under one management, with a separate Ministry and its own annual budget. The network carried about 17 million Passengers and 2 mt freight every day on the route of 63,327 km (2006-07). Although key business operations are freight and passenger, IR is also engaged in several allied services including parcel, catering and production units. Nearly 70 percent of IR’s revenues come from the freight operations, which can be segmented into bulk and other cargo. Over the years, IR has predominantly become a bulk freight carrier, accounting for about 94 percent of the freight revenue. Coal alone accounts for nearly half of the bulk traffic carried. Passenger business accounts for nearly 60 percent of IR’s total transport effort, in terms of train kilometers, but yield less than 30 percent of the total revenues. Suburban services account for 57 percent of the originating passengers, while contribute to only 8 percent of the passenger revenue. To understand the development process of IR’s over the past twenty years, the study covers issues and strategies related to financial and physical aspects of revenue generating freight and passenger traffic from 1987-2007. Study also covers the developments in the parcel, catering and advertising sector. W.P. No. 2008-07-05 Page No. 2 IIMA y INDIA Research and Publications Indian Railways in the Past Twenty Years Issues, Performance and Challenges1 1 Introduction The Indian Railways (IR), more than 150 years old, is among one of the largest and oldest railway systems in the world. It has an extensive network, and played an integrating role in the social and economic development of the country. IR is a principal mode of transportation for long haul freight movement in bulk, long distance passenger traffic, and mass rapid transit in suburban areas. It occupies a unique position in the socio-economic map of the country and is considered as a vehicle and a barometer of growth. It is also the biggest state owned enterprise in India, and contributes about 1% of India’s GNP. Objectives The objectives of this paper are − strategic assessment of rail sub-sector from 1987 to the present − focus on the trends in sub-sector performance and key issues for the period, including consideration of changing public and private roles. The IR System IR is state owned and operated under Ministry of Railways (MOR), Government of India (GOI). IR’s finances were separated from the general exchequer in 1924 based on Ackworth Committee report and its annual requirement for funds is voted through a separate budget presented to the Indian parliament. The MOR functions under the guidelines of Minister for Railways assisted by Minister of State for Railways. The policy formation and management of Indian Railway Board comprises of Chairman and six functional members (Exhibit 1). Wide powers are vested in the Board to effectively supervise the running of 16 zonal railways, metro railway (Calcutta), production units, construction organization and other rail establishments. These are generally headed by General Managers. 12 subsidiary organizations under the MOR namely CONCOR, CRIS, DFCCIL, IRCON, IRCTC, IRFC, KRC, MRVC, RCIL, RITES, RLDA, and RVNL undertake specialized jobs contributing to IR’s growth and progress. IRCON and RITES have their business abroad also. IR is a vertically integrated organization controlling its own facilities, performing all operating and administrative functions and unilaterally determining what services to provide. In addition to carrying out the core business of rail transport, IR also owns and manages activities such as design and manufacture of rolling stock, overhaul and remanufacture of rolling stock, construction projects, schools, technical institutes, housing, hospitals, hotels etc. IR supports a work force of about 1.4 million constituting 5% of the 27 million people employed in the organized sector. They are governed by central government rules for salary and other conditions of service. Another 0.7 million employees are supported indirectly through establishments servicing IR. 1This paper was prepared as inputs for the ADB study titled “Selected Evaluation Studies for 2005: SAPE for the Transport Sector in India.” We thank ADB for the support provided. W.P. No. 2008-07-05 Page No. 3 IIMA y INDIA Research and Publications Exhibit 1: Organization Structure of IR [MOR, 2008, Annual Report & Accounts 2006-07] W.P. No. 2008-07-05 Page No. 4 IIMA y INDIA Research and Publications Performance Review (1987-88 to 2006-07) The trend of IR total earnings and total working expenses are shown in Exhibit 2. The good years were between 1993-94 to 1995-96, after which the expenses caught up with the revenues until 2000-01, when the net revenue shrunk to a little over Rs 1000 crores. The situation started improving steadily to reach an actual net revenue of over Rs 14,000 crores in 2006-07, for a total earnings of Rs 62,731 crores. The increase in net revenue is attributed significantly due to better utilization of freight rolling stock and partly due to change in accounting practice, wherein principal payments towards rolling stock have been capitalized. Exhibit 2: Total Earnings and Total Working Expenses 70,000 Total Earnings Total Working Expenses 60,000 50,000 e 40,000 r o r c 30,000 Rs 20,000 10,000 0 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 - - - - - - - - - - - - - - - - - - - - 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 19 18 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 [MOR, Various Years-a] Based on the ratio of total working expenses to total earnings, a parameter called the operating ratio is assessed as a percentage. Exhibit 3 presents the operating ratio since 1987-88. The operating ratio had reached a peak of 98.3 in 2000-01, reflecting a relatively poor performance. After that, it had reduced year on year till 91.0 in 2004-05. It dropped sharply to 78.7 in 2006-07. (As stated above, this was both due to better utilization of rolling stock and changes in accounting practice.) W.P. No. 2008-07-05 Page No. 5 IIMA y INDIA Research and Publications Exhibit 3: Operating Ratio of IR 101 99 98.3 97 96.0 95 93.3 92.3 93 93.1 93.3 92.1 92.5 92.0 91 91.5 90.9 91.0 89.5 t 89 n e c 87.4 r 87 86.2 Pe 85 83.7 83 82.6 82.9 82.5 81 79 78.7 77 75 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 1987- 1888- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- [MOR, Various Years-a] The net revenue receipts are then appropriated for dividends payable to the government of India and into various capital funds. Exhibit 4 gives the dividends paid out of the net revenues, including when the payment was due to deferred dividends. As can be seen, the deferred dividend payments have happened in the “good” years, which have followed the “bad” years when the IR would have sought deferment of the dividend. The deferred dividend liability from 1978-79 onwards aggregated to Rs 428.43 crore by end of March, 1990. The amount was cleared by 1992-93. The dividend payable in 2000-01 and 2001- 02 worked out to be Rs 2,131 crore and 2,337 crore respectively, out of which Rs 1823 crore and Rs 1000 crore respectively have been transferred to a deferred dividend liability account. Exhibit 4: Net Revenue Receipts 16,000 14,453 Deferred Dividend Current Dividend Excess/Shortfall 14,000 12,000 e 10,000 r 8,005 o r 8,000 c Rs 6,000 5,274 4,478 4,135 3,808 3,625 3,830 3,102 4,000 3,024 2,736 2,338 1,955 2,141 1,541 1,113 1,071 2,000 723 737 982 0 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 - - - - - - - - - - - - - - - - - - - - 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 19 18 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 [MOR, Various Years-a] W.P.