The Ninth Plan document observed that the overall fare structure did not generate sufficient internal resources required for capacity expansion. As a result, internal resource generation, which was as high as 60 per cent even in the Eighth Plan, has come down to nearly 30 per cent during the current financial year. The document admits that increasing freight rates at the upper end cannot raise additional resources as they are already too high.

Studies conducted in the past decade or so have revealed that fixed costs are almost exclusively borne by freight traffic. Accordingly, the average rate per tonne km. is nearly 3.5 times the rate per passenger km. With the quality of passenger services having improved and its standards progressively upgraded, average cost per passenger km. has increased. On the other hand, the Railways, as a policy, have eliminated the wagon load and part wagon load traffic and consequently done away with a lot of costly marshalling and shunting operations and detentions at junctions, thus reducing the average cost per tonne km. With the ratio of rate per passenger km. to tonne km. declining over a period of time (when it should have increased), it is clear that passenger services are increasingly being under-priced while freight services are over-priced.

It is no wonder that the Railways are losing out to the roads in regard to movement of freight. There is, thus, a definite case for increase in passenger fares. This may specifically relate to traffic in the second class mail/express component (mainly long-distance inter-city non-suburban). This segment accounted for nearly 50 per cent of the passenger km. and 55 per cent of the revenue generation in 1997-98. Even a mere 10 paise increase per passenger km. could generates an additional revenue of almost Rs 1,800 crore. And it is widely believed that there would not be any significant downward trend in traffic in response to the fare rise (or in other words, inelastic demand).

Limited market surveys have shown that only 27 per cent of passenger travelling second class have an annual income of less than Rs 30,000.

Further, as much as 15 per cent of second class travel is undertaken by affluent passengers with income exceeding Rs 72,000. Railway budgets have attempted very little in the past decade by way of rationalising the tariff structure so as to provide a clear direction for the Railways to formulate a dynamic tariff policy, especially in the context of the new economic policy where they are required to operate on a commercial basis and generate adequate internal surpluses. Whatever little has been attempted especially in relation to freight tariffs has only contributed to upsetting the rate structure which is normally expected to be based on a certain perspective reflecting relative costs, class rates, traffic rates and socio-economic importance of different commodities.

With the Prime Minister's Economic Advisory Council strongly recommending hike in passenger fares, it is doubtful whether the minister can postpone such a move any more.

An implication of declining internal resource generation has been an increasing dependence on external resources. With budgetary support also reaching low levels, the system has resorted to borrowing in a big way.

Since 1987-88, the Indian Railways have raised a part of the Plan funds allocated to it through the sale of bonds (taxable and tax-free). This has been done in an indirect way through the India Railway Finance Corporation (IRFC).

From 1988, the Railways have been acquiring rolling stock through IRFC against payment of leasing charges. The Railways have retained the option to buy back these leased assets at the end of the lease period at a nominal price or continue lease arrangements by reducing charges. A point that has often been made in recent years is that borrowings through IRFC are a costly proposition which the Indian Railways can ill-afford. Leasing charges at, say, 14.5 per cent paid by the Railways are more than double the dividend paid by them. Lease charges have risen sharply over the last decade. It is argued that not even the high-rated services can bear the high lease charges. It appears that the Railways are treating IRFC as another source of funds which it spends without analysing which of its services, if any, can bear such high cost funds.

Recently, the finance ministry said that railway finances were under tremendous strain because of the unsustainably high level of market borrowings and that the Railways should not go in for further borrowings in the coming Budget. It is in this context that the argument in favour of a limit on borrowings through the IRFC becomes significant, especially when one needs to keep in mind what the Indian Railways can accommodate within its gross traffic receipts (working expenses) without impairing financial viability.

The Status Paper on Indian Railways brought out by the ministry of railways in 1998 had raised hopes of significant measures to put the organisation back on the rails so that it may support the high growth path that has been envisaged under a liberalised economic framework. When read together with the Ninth Plan which, in a limited way, sought to provide a sort of blueprint for survival and even growth of the Railways in the new millennium, the feeling was one of reasonable hope. But the railway budgets of 1999-2000 and 2000-2001 were truly disappointing.

Given the immediate economic compulsions, the budget for 2001-02 should be different. But given the political compulsions, it can be expected to be no different. If so, the long-term survival of the railway system will be severely threatened.

(The writer is Walchand Hirachand Professor of Transport Economics, Department of Economics, University of Mumbai)