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Putting Railways' finances on track
November, 30th 2006
Quick lessons to be learnt from the Railways are: Volume growth, customer-friendly measures, and use of modern technology to improve productivity. MS VIJAYALAKSHMI VISWANATHAN, FORMER FINANCIAL COMMISSIONER OF THE RAILWAYS.

MS VIJAYALAKSHMI VISWANATHAN, former Financial Commissioner of the Railways.

A press release dated November 24 on states, `Overall performance of Indian Railways goes up'. On the one side, earnings have increased by 13 per cent, both in the freight and passenger segments, in the first six months of this fiscal, from about Rs 28,600 crore in the first half of last year. And, to augment the bottomline, working expenses too fell impressively in absolute terms. For example, working expenses for October were down by Rs 449 crore, from the budget provision of Rs 2,912 crore to Rs 2,463 crore (actuals). Accidents have come down and punctuality percentage gone up. B-schools line up to hear the Minister, and professors are making case study of what is seen as an amazing turnaround. To know more about the finance miracle in the Railways, Business Line contacted Ms Vijayalakshmi Viswanathan, former Financial Commissioner of the Railways. Here is her take on a few questions:

What is the story behind the comeback?

To get a hang of this miracle, it is essential to go into some fundamental characteristics of this vital infrastructure. Indian Railways is next only to the Army in discipline, commitment and dedication. Its fortunes are inextricably linked to the country's industrial, agricultural and economic development. While keeping its excellent labour force content through an enlightened policy of involvement of workers with the institutionalised forum PREM (Participation of Railway Employees in Management), the Railways embarked upon certain long-range policy initiatives when it saw the writing on the wall with an all-time high operating ratio (or the percentage of working expenses to gross earnings) of 98.3 per cent during 2000-01.

Reasons for the spike in operating expenses?

The tremendous financial strain was a fallout of the implementation of the Fifth Pay Commission recommendations. A slump in economic growth also took its toll on railway finances. The system was stuck with over-aged assets affecting reliability and fluidity. The need of the hour was to revamp the system and introduce innovative measures.

How did the organisation respond to the challenge?

The Railways prepared a `reform agenda'. The basic thrust was to develop a `business orientation'. Plus, rationalisation of tariff structure, restructuring of core and non-core business, introduction of competition in certain sectors, and effective control over expenditure. Right-sizing of staff and reduction of the energy bill, two major components of the Railways' operating expenditure, were identified for focus.

What was the approach towards ageing assets, safety problems and replacement costs?

A major development in the organisation was the setting up of the Special Railway Safety Fund in 2001-02 to replace and renew over-aged tracks, bridges signalling systems and rolling stock. A six-year action plan was drawn up with Rs 17,000 crore funding, 70 per cent of which came as a grant from the General Exchequer. The balance was met internally through Safety Surcharge. Time-bound execution of identified replacements and renewals with latest technology improved reliability and productivity, and greatly enhanced the system's efficiency.

What were the specific revenue-related reforms that yielded dividends?

These moves commenced in 2002-03 with major tariff rationalisation, something that was to continue with greater vigour in the subsequent years. Our aim was to make freight rates competitive by reducing the cross-subsidy. There was no across the board increase in freight tariff during 2002-03. The number of freight classes was reduced from 59 to 32 and the ratio between the highest and lowest classes was brought down drastically from 8.0 to 3.3.


Basically a class represents a commodity group. The freight classification consists of a goods tariff that assigns a class to a commodity. Higher the class, higher the rate. As a measure of rationalisation the number was reduced from 59 stages to 32. This has since been reduced further in the current budget to 28. The rate for the highest class was eight times more than for the lowest class. This got changed to 3.3, partly due to a reduction in the highest class and partly through marginal adjustments in the lower class.

How did subsequent Railway Budgets push ahead the reforms?

The Budget of 2003-04 saw the highest class lowered from 300 to 250, and freight rate reductions ranging from 4 per cent to 7 per cent, to enhance the rail-coefficient of high-rated commodities. Rail-coefficient is the share of movement by rail of the total production. `To-pay' surcharge was also lowered from 10 per cent to 5 per cent for all goods while the reduction for coal was from 15 per cent to 10 per cent. Yet another incentive for industry came in the form of `train-load' classification, one stage lower for those commodities that had only a wagon-load class. This meant that bulk movement was cheaper by 4-5 per cent.

Who benefited from the reduction in the highest class?

Reduction in the highest rate from 300 to 250 meant a decrease in the rate by nearly 16 per cent. The current Budget promises that the rate, which is 220, will be reduced further to just the double, that is, 200. Rates for certain commodities were reduced. Basically those which had a classification above 130 got the benefit of reduction. In percentage terms this worked out to 4-7 per cent.

Some of the commodities that derived the benefit were pig iron, iron scrap, refined vegetable oil, iron and steel, LPG and petrol. Some of these commodities were moving by road and, hence, the reduction was to attract movement by rail, and thus increase the rail-coefficient.

Tariff hikes would have helped?

Enthused by the buoyancy in freight movement with an incremental loading of 39 million tonnes the preceding year, the Budget for 2004-05 did not propose any increase in tariff. However, mid-course correction was carried out in November 2004 and freight of coal and iron ore was increased by 7.7 per cent and cement by 3.7 per cent. Booming iron ore exports were indicative of the mining industry's ability to absorb the increase in tariff and the opportunity was exploited in December 2005 again. The impact of these revisions coupled with higher carrying capacity of 4-8 tonnes per wagon can be seen from the yield per million tonne figures. The earnings, which stood at Rs 42. 5 crore per million tonne during 2004-05, rose to Rs 55.5 crore in 2005-06, and are expected to go up further to Rs 56.5 crore this fiscal.

Were there innovations in pricing?

Yes, dynamic pricing policy in 2005-06 is one example. This took note of peak and non-peak seasons as well as empty-flow direction. The Budget for 2006-07 carries forward this experiment by offering discounts of up to 30 per cent on incremental traffic during non-peak season and 20 per cent in the peak season with certain conditions in the empty-flow direction.

How did the Railways manage to control the two main heads of expenditure?

Effective expenditure control measures simultaneously improved the financial health of the system. One, manpower planning was adopted in right earnest, and this led to a gradual decrease in staff cost. Total staff strength, which was 1.55 million in 2000-01, decreased to 1.42 million in 2004-05. Staff cost including pension, which was 53.9 per cent in 2000-01, is 53.2 per cent in 2005-06. It is anticipated to decline further to 52.8 per cent in 2006-07. And, two, total fuel cost is kept well under control. Though the fuel bill, which was Rs 6,873 crore in 2001-02, has increased to Rs 10,094 crore in 2005-06, traffic output has also gone up phenomenally. `Passenger train km' has increased from 453 million to 516 million, and freight output has gone up from 316 billion `net tonne km' to 411 billion. Diesel rates have been going up, the impact of which has also to be reckoned.

What has been the manpower strategy?

The Railways has adopted manpower planning as a strategy for nearly 15 years now. Fresh creation of posts was allowed only for new assets and new activities and that too with matching surrender. The orientation now is to enhance competitiveness and permit manpower intake to meet the emerging business needs consistent with financial viability of the system.

Did the shedding of non-core business add to the revenues?

The Railways' efforts to segregate core and non-core business resulted in the setting up of IRCTC (the Indian Railway Catering and Tourism Corporation) to take care of catering service. RailTel came into being to exploit the opportunities in telecom business. A Memorandum of Understanding with Central Warehousing Corporation was entered into for setting up warehouses to provide total logistics solution to its customers.

Freight Operating Information System achieved the same results for freight sector as Passenger Reservation System did in the 1980s to the passenger segment. Positive outcome of all these measures is a healthy growth in traffic revenues. The growth rate in percentage was 16.6, 21.4, 24.2 and 12.6 during the financial years 2002-03 to 2005-06 respectively. Operating ratio too has been registering significant improvement, dipping from 98.3 per cent in 2000-01 to 86.6 per cent in 2005-06.

Have the internal accruals grown?

The Fund balances of the Railways consist of Depreciation Reserve Fund, Development Fund, Pension Fund, Railway Safety Fund and Capital Fund. Improvement in Railways' finances led to a more than seven-fold increase in these. The total of the Funds, which stood at Rs 1,527 crore in 2000-01, has grown to Rs 11,280 crore in 2005-06.

What are the Railways' plans to convert this bonanza to create greater customer satisfaction and staff contentment?

The Budget for 2006-07 spells out these. The year has been declared as the year of `Passenger service with a smile'. Improvement in passenger amenities has to be accorded priority. So far as staff are concerned a nearly nine-fold increase in contribution to Staff Benefit Fund, construction of 100 community halls, improved medical facilities, etc., are a few measures announced in the Budget. The Railways' decision to go in for a Dedicated Freight Corridor is reflective of its optimism in the freight sector, fuelled by the growth projections of the economy. The Railways has shown what a dedicated workforce and right attitude and strategy can achieve. No wonder the organisation is in the news for the right reasons.

What, according to you, are the immediate takeaways for a public sector manager from the successful experiment in the Railways?

Many public sector undertakings have realised the value of a business-led approach rather than a production-oriented strategy. Further, reengineering measures aimed at cost-cutting are vital for any organisation. Quick lessons to be learnt from the Railways are: Volume growth, customer-friendly measures, and use of modern technology to improve productivity.

Any lessons for the private sector, which traditionally believes that social objectives and profit orientation don't go together?

Social obligations are equally relevant if the country has to improve its Human Development Index. The corporate sector has a definite role to play in this regard. The Railways has been a model employer in providing basic needs of the staff. Critics who argue that the provision of health, education and welfare facilities in-house by the Railways are non-core and therefore should be outsourced, fail to take note of the far-flung and round-the-clock nature of Railway operations. An enlightened policy is required from the private sector.

D. Murali

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