1. Column: Railways reform must go beyond symbolism

Column: Railways reform must go beyond symbolism

Restructure the Railway Board on the lines of its different businesses & create the necessary IT infrastructure

Updated: February 24, 2015 11:34 AM

The NDA government’s election manifesto included modernising India’s railway system. It is well known that the current system is grossly inefficient and inadequate. It loses large amounts of money, and its poor state represents a significant drag on Indian economic growth. What is being done?

The Prime Minister understands the value of symbolism in improving the system. A few high-speed trains are being introduced, and even a flagship bullet train is on the cards. The PM has spoken of upgrading train stations—starting with perhaps a dozen—to be like airports. He is willing to privatise the operation of train stations, and use their real estate more effectively, adding commercial space overhead, above the tracks. He recognizes the importance of connecting India’s Northeast to the rest of the country, and internationally, through rail links.

The new government has also approved 100% FDI in railways (with possible exceptions for security reasons). In this, the NDA is following the lead and extending the proposals of its predecessor, the UPA. In fact, the groundwork for all aspects of railway reform was laid in a major study commissioned by the UPA government. The India Transport Report, produced by the National Transport Development Policy Committee (NTDPC), was published earlier this year. The NTDPC was chaired by Rakesh Mohan and began its work in 2010. The report provides a comprehensive, integrated analysis of India’s transport needs over the next two decades, and is a model of clarity in technical and policy dimensions. The section on the railways alone is over 120 pages. What can one learn from the report?

The railway sector analysis notes the failure of railway capacity to keep up with the Indian economy’s needs. This has led to a downward spiral, with road transport filling the gaps, but doing so sub-optimally, at a cost of as much as 4.5% of GDP, in addition to unmeasured environmental costs. The fundamental recommendation of the NTDPC is more radical than piecemeal privatisation or appointment of a competent and honest railways minister (somewhat of a rarity in recent years): it makes the case for separating railways management from the government, with the railways ministry restricted to policy setting. An independent railways corporation would be regulated by an independent authority.

This reform alone is a huge, complex project, including major legislative changes, and could take longer than the 5 years the NTDPC envisages. It is bolder than what the current government has put on the table. However, it may well be that the government has to experiment and chip away at whatever problems it can within the existing institutional structure, to lay the groundwork for more radical reform. What are the first steps?

Two previous expert groups have already recommended jettisoning an archaic organisational structure (departments such as civil engineering, mechanical engineering, etc) and reorganising the Railway Board on business lines, such as infrastructure management, freight transport, passenger transport, parcel, and miscellaneous activities. These would then be separate profit-centres. Complementing this restructuring would be a recasting of accounts in a format consistent with standard practice for Indian company accounts. Another complementary reform would be acquisition and internal development of the human capital needed to run modern operations, and to develop appropriate PPP.

The railways also have to do much better in terms of being integrated into a multimodal transport system that includes roads, airplanes and shipping. Each of these components needs its own upgrading, but the railways are arguably the core of India’s transport needs (as the PM seems to recognise and be articulating in political speeches), as well as the weakest link in the system. The computerisation of the passenger reservation system came in the early days of the information technology (IT) revolution, and back-end infrastructure for reservations could be integrated with the later innovation of the internet. Now, there is an enormous need for creating an IT infrastructure for supply chain logistics, and an associated opportunity for Indian IT firms to put their expertise to new uses domestically. In earlier research, I examined why Indian firms do not adopt IT when it would theoretically pay off for them—there are financial and managerial hurdles, but the availability of and benefits of connecting to a national supply chain management system could be one spur to IT investment by those firms.

The remaining recommendations of the NTDPC are straightforward to pursue once institutional reform occurs: they include capacity expansion, faster speeds, improved investment planning, better project execution, separation of long haul and suburban networks, more rational tariff setting procedures, and greater attention to safety (which requires relatively small physical investments, but significantly more training).

Like many aspects of India, the railways are a legacy of colonial rule. India’s elites were happy with class distinctions in trains, then abandoned rail travel for cars and airplanes as soon as they could. The new government’s rhetoric challenges this elitism, harking back to Mahatma Gandhi’s travel in third-class. The crucial difference is that Gandhi did not rule. The present government does, and can go beyond symbolic gestures.

By Nirvikar Singh

The author is Professor of Economics, University of California, Santa Cruz

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