India’s call centres, software firms and drugmakers are booming. But much of the rest of the country’s economy remains mired in bureaucratic and ideological constraints. To gauge the difficulties of putting India’s economic reforms on track, consider its railways, once the vanguard of modernization.
Unusually, India’s Parliament hears two annual budget speeches. One, delivered by the minister of finance, goes over the normal boring stuff: health; defence; education; taxes; tariffs and so on. The other, delivered a couple of days earlier, covers the railways. The survival of this bizarre system, introduced by the British colonial government in 1924, tells you two things about India’s railways: first, at a time when many railway systems around the world are being privatised, or at least run as independent corporations, India’s remain an arm of government; second the system is both huge – by one estimate the world’s largest commercial enterprise in terms of its employees-and enjoys a unique national importance.
It
also, however, shares many of the troubles that have afflicted other state-run
railway networks in recent years. Most importantly, it does not make enough
money to meet its investment needs. Its “operating ratio” – operating costs as
a proportion of revenues – which had climbed close to 100% by the beginning of
this century, has fallen to 92.5%. But that is still not enough to cover
depreciation, maintenance and expansion.
Nor can the railways rely on indefinite government bail-outs at a time
when India’s overall fiscal deficit (at more than 10% of GDP) risks becoming
unsustainable. Yet the railway system has been losing customers to an improving
road network, making it hard to see how its finances will ever improve.
On
top of this, the railway system is under attack for its safety record. Its own statistics belie the impression
given by the frequent reports in Indian newspapers of an especially
accident-prone system. Measured per millions of train-kilometres
travelled, India has fewer rail accidents than Japan (055 as opposed to 0.65).
But, according to its own white paper on safety produced this year, it suffers
a far higher death rate than Japan (0.8 per billion passenger-kilometres,
compared with 0.1).
The
railways’ critics accuse it of making no distinction between unviable and
commercial projects. On one estimate, 50% of its lines are under-used and 30%
are over-used – primarily the main “high-density” inter-city corridors. These
days, the most lavish “strategic” projects, such as a rail link to the
Indian-controlled Kashmir valley that, it is hoped, might dampen separatist
sentiment there, are paid for out of another government budget. But the
railways are burdened, says a former senior railways executive, by a system
which demands that the minister spread
his funds thinly in response to the pressure from members of Parliament and
state assemblies. As a result, many projects get a “token allocation”, but few
are ever completed.
Not
all the criticism directed at the railway is fair. But, because they were an
essential part of the attempt in the 1950s and 1960s to impose a planned
socialist economy on India, their reform has also come to be seen as an
essential part of that economy’s dismantling. Since a wave of liberal,
market-oriented measures in the early 1990s debate about how to reform the
railways has intensified.
From there, the network grew fast. Some of it was built by the
British Raj, some by the princely states, such as Bikaner and Jodhpur, which
retained their notional independence. Many of the network’s main trunk routes
were laid by private companies under schemes that would now be described as “build-operate-transfer”.
Passenger numbers increased from 24m in 1901 to 42m in 1917. By 1922, almost
60,000 km of track had been laid. In
a controversy that would find echoes in
contemporary India, the rail operators, which enjoyed a government-guaranteed
minimum return, were suspected of exorbitant profit-gouging. IN 1924, the
entire system – its construction, operation and financing – was brought under
the control of the British Indian government.
The
shape of the network had been dictated mainly by the commercial, industrial and
administrative requirements of the British empire, as well as by the vanity and
convenience of individual maharajahs.
But it came to be credited with an important role in integrating not
just the Indian economy, but also in helping to create the “nation” itself.
Not
everybody welcomed it. In 1909, Mahatma
Gandhi, hero of India’s independence struggle, blamed the railways (along with lawyers
and doctors) for impoverishing the country. Railways, he argued, spread famine
because they helped farmers to sell
their grain to the dearest market. They
“accentuate the evil nature of man. Bad
men fulfil their designs with greater rapidity”.
Independent
India, however, took to the railways with gusto. It lavished money on modernising
a system that, at the time of independence in 1947, had only steam locomotives.
Today, Indian Railways is the largest organisation in the country, both in
number of employees – more than 1.5m- and in capital invested, some $10
billion. It has 63,000 km of routes,
7,700 locomotives and nearly 7,000 stations. It carries 1.4 m tonnes of freight
and 14m passengers every day -
equivalent to moving all of India more than four times a year.
It
is also a tottering tower of vertical integration: its units are engaged in
designing, making and maintaining rolling stock; in building work; in running schools,
hospitals, housing and hotels; and in catering, both for passengers and staff.
Besides those it employs directly, Indian Railways issues licences to 36,000
uniformed porters and 11,000 authorised hawkers. Tens of thousands
more-shoeshine boys, touts, scavengers, beggars and auto-rickshaw drivers –
congregate around stations to make their unlicensed livings.
Indian Railways is “one of the most studied institutions on the planet” according to a report published in 2001 by a government-appointed group chaired by Rakesh Mohan, an economist who is now deputy governor of the Reserve Bank of India, the Central Bank. The Mohan report is a damning indictment of the way that Indian Railways is run, and a prolonged argument for “radical structural change”.
Many
of its conclusions have since been endorsed by further reports from the World
Bank and the Asian Development Bank. None goes the whole neo-liberal hog and
promotes wholesale privatisation. All, however, agree that the railways should
be run on commercial lines and that, if the government wants to subsidise
services, then the subsidies should be transparent.
This
simple conclusion has a number of far-reaching implications. It means that Indian Railways should start
divesting itself of “non-core” activities, such as catering and manufacturing;
that its top management, a seven-member Railway Board, should shed its
conflicting responsibilities as regulator, policymaker and boss; and that it
should start producing intelligible accounts. Similarly, it should establish
standard commercial criteria for its
investments. But above all, it should
stop using its freight customers to subsidise passenger fares.
Many
changes designed to meet these challenges are chugging along sedately. But because of its history, its scale and
its usefulness to so many political interests, Indian Railways presents a
special challenge to reformers. The
roots of that challenge lie in an addiction to vote-catching subsidies, a fear
of the power of organised labour, a deep suspicion of privatisation, and a
reluctance to lose the power to dispense political patronage.
“Trains
cannot be run for charity”, wrote Gandhi in 1947. The Mahatma, by then clearly a convert to rail travel, was
incensed that so many of his countrymen were fare-dodgers. Ever since, many
Indians have taken cheap rail travel for granted. And there are railway officials who support them. One of them says “we perceive ourselves as
being not a transport organisation, but part and parcel of the running of this country.”
The
railway, he says, has to transport not just urban commuters and tourists, but
also landless labourers in search of distant work and ascetic pilgrims on their
way to the holy city of Haridwar. At
election time, it has to shift voting machines, politicians, officials,
paramilitary guards and voters. The job extends to “the preservation of
democracy itself”.
All
well and good, say the railway’s critics.
But why does the freight customer have to foot the bill? Passenger
trains account for nearly two-thirds of railway services, but produce just one-third of revenues. According to the
railways’ own figures, moving one passenger one kilometre made a loss of 15
paise ($0.003) last year. Shifting a
tonne of freight made a profit of 16 paise. As a result, the ratio of passenger
fares per person-kilometre to freight rates per tonne-kilometre is among the
lowest in the world: about 0.3, compared with 2.2 in Japan. China may be a more
instructive comparison. Between 1994
and 1998, it raised passenger fares by 75%, lifting the passenger fare to
freight-tariff ratio from 0.9 to 1.2
Y.P. Anand, a former chairman of India’s Railway Board, argues that a move in that direction is logical in India, where passengers, by and large, are becoming more expensive, as they demand more space and comfort, while freight by contrast costs less, as improved technology leads to better and faster use of space. One consequence of Indian Railways’ present bias, according to a rough calculation by the World Bank, is that freight tariffs could be reduced by more than 40% if its social burdens were paid directly by the user or the government. Manashi Roy of the Confederation of Indian Industry, a private-sector lobby in Delhi, says that for some users it has become cheaper to import coal and steel than to move it internally.
Yet
in his budget in February this year, as last year, Nitish Kumar, the minister
of railways, announced that there would be no increase in passenger fares. He
also refrained from an across-the-board increase in freight rates. In practice, however, Indian Railways has
been tinkering with the distortion in the tariff structure by simplifying
categories and classes. It has managed a stealthy 14% rise in passenger fares
over the past three years, against a mere 2% rise in freight charges.
The
need for stealth is obvious. In his own budget speech, India’s finance
minister, Jaswant Singh, proposed a modest dent in the subsidies poured into
both food and agriculture by announcing an increase in the price of
fertiliser. At once assailed by his
foes as anti-farmer and his friends as anti-voter, Mr Singh was forced to
retract and to leave the subsidy intact.
Indian
politicians are addicted to a tax-and-subsidy regime of bewildering complexity, and deterred from
tampering with it by a crowded
electoral timetable. The Mohan
report, for example, estimated that 15% of Indian railway passengers, many of
them railway workers, were enjoying discounted fares. Among the 42 categories
of people listed as eligible for concessions are students, boy scouts, the
elderly, the very poor, war widows, nurses, journalists and some “persons
taking part in mountaineering expeditions”. Even some sorts of freight- fruit
and vegetables and salt, for example – are subsidised.
The
tariff structure has, predictably, led to a loss in market share to the roads,
oil pipelines and coastal shipping. The railways’80% share of the freight
market in the 1950s has fallen by half and, some studies suggest, might fall to
25% as the roads improve further. In particular,
a so called “golden quadrilateral” project aimed at linking with four-lane
highways the four big cities of Delhi, Kolkata, Chennai and Mumbai (the last
three are the Calcutta, Madras and Bombay of yore) poses a threat not just to
freight volumes but, through high-speed buses, to passenger numbers as well.
The
railways say they are meeting the challenge.
Freight volumes grew 4.5%, to 515m tonnes, in the last financial year
ending in March. R.K. Singh, chairman
of the Railway Board, boasts of an even better performance in the first half of
this year, with an increase of 18 m tonnes.
Critics, however, say that the railways are not expanding nearly fast
enough to meet the needs of an economy that is expected to grow by as much as
7% this year, a rate that optimists say can be sustained for years.
The
railways employ some 6% of the workforce in India’s “organised” sector, and its
managers are proud of their record of good industrial relations. This, say
cynics, is not surprising. Their workers are civil servants, benefitting from
the awards of government pay commissions. Indeed, Mr Anand, the former Railway
Board chairman, blames the awards of the fifth such commission, for messing up
the railways’ finances. Mounting pension liabilities cause particular
concern. By 2002, the railways had 73
pensioners for every 100 employees, and pensions consumed nearly 15% of
revenues. Overall staff costs are more
than 40% of gross traffic compared with about 15% in China, where the railways
have shed non-core businesses.
Indian
Railways scores badly in most international productivity league tables. Again,
its officials say improvement is under way. It aims to have reduced staff
numbers to 1.2 m by 2010. That reduction, of a fifth, is the minimum the Mohan
report thought necessary by 2008, and it is not clear how it will be achieved.
Since 1994, the railways have been shedding staff through natural attrition at
the rate of only about 2% a year. This
year, say officials, there will be no reduction in numbers, in order not to
jeopardise safety standards. The workforce has been promised that reform will
not entail a single sacking. It is important, says one manager, to keep
the support of the staff. “These workers
can cripple the economy”.
Fear of the workers’ reaction is one reason why politicians and civil servants tread so gingerly around the issue of privatisation, not just in the railways but in other public sector operations as well. In September, for example, a petition from oil workers helped to win a ruling from the Supreme Court stalling the government’s sale of two oil companies. For the railways, ambitions are limited to “corporatising” non-core operations so they can become distinct profit centres, and the introduction of some private-sector minority participation. A number of new projects are being undertaken by specially formed joint-ventures. ConCor, a container company in 1989, and since listed on the stockmarket, is something of a model.
More
recently, in 2001, the management of catering contracts was “hived off” to a
subsidiary, IRCTC, which is showing what can be achieved when the railways’
managers are set free. Entrepreneurial
staff at IRCTC decided that it should go into the business of selling tickets
on the internet. By this September it
was selling 67,000 a month. This is trivial compared with the 500,000 reserved
tickets that the railways sell every day, but it nevertheless makes IRCTC the
biggest e-business in India.
Stalk
the long corridors of Rail House in Delhi and it is hard to believe that this
is the headquarters of the organisation dissected by the Mohan report and
others. Whereas Mr. Mohan talked
repeatedly of a “financial crisis” and the World Bank argued that the choice is
between “significant change”, and “financial and operational collapse”, Mr. Singh,
the Chairman, says the Mohan report is still “under scrutiny”. But he rejects
its call for a “high growth path”, nor does he see the need for a separate
regulator since “we are the only player in the field.” In other words, Rail
House is in the grip of what the Mohan report called “repairists”, not “re-inventors”.
Some
of the discrepancy between the two extreme views of Indian Railways is
explained by the success of reforms introduced since the Mohan report, and the
coming into effect of some that were initiated earlier. Partly, it may be, as Mr. Anand argues, that
the report fell into one of the traps it itself identified, and confused
financial performance with operational efficiency. The railways’ intricate network of subsidies might be designed to
obscure any link between the two.
But
much of the disagreement is between economists looking at the railways as a
business, and dedicated civil servants looking at what they still see as a
public utility and social service. As
one senior railway official, who believes he works for “a healthy, growing
railway”, puts it, “if you moved to a business model, Indian Railways would
collapse.” As with so much of the Indian public sector, re-invention will be late
in arriving.