India’s smaller businesses were being priced out of the country’s cheapest freight option even though rail transport costs nearly half as much as road transport per tonne. This is according to a new report by KPMG in India and the Federation of Indian Chambers of Commerce and Industry (FICCI).
The report found that Micro, Small and Medium Enterprises (MSMEs) bore a disproportionately high logistics burden despite rail’s structural cost advantage. It also laid out why terminal access and wagon availability, not freight rates alone, were keeping smaller shippers off the rail network.
Why rail freight is cheaper than road transport for MSMEs
India’s total logistics expenditure stood at roughly Rs 24.01 lakh crore in 2023-24, or 7.97% of GDP, according to estimates cited from the National Council of Applied Economic Research (NCAER). But the report found that this burden was not shared equally. Micro enterprises incurred logistics costs of up to 16.9% of their output, compared with just 7.6% for large enterprises with turnover above Rs 250 crore.
This was despite rail offering a clear price advantage, average transport costs worked out to Rs 1.96 per tonne-kilometre for rail against Rs 3.78 per tonne-kilometre for road, per NCAER’s mode-specific estimates. Multimodal rail movements were estimated to become cost-competitive with road at distances of roughly 500-600 km.
Yet road continued to dominate freight movement in the country. The report argued this was because businesses weighed more than just the price of moving goods and for MSMEs, hidden costs linked to accessing rail infrastructure often cancelled out the savings on the line-haul itself.
Why MSMEs still choose road transport over rail
Applied to three representative commodity flows over distances of 1,100-1,500 km, the framework showed rail losing its edge in practice. For engineering goods and auto components moving between Rajkot and Delhi, rail worked out only marginally cheaper than road, at a 2% advantage. For agricultural products moving from Nashik to Kanpur, rail turned out 26.4% costlier than road because of spoilage and delays. For non-integrated steel manufacturers moving cargo from East Singhbhum to Ghaziabad, rail cost 24.8% more than road once first- and last-mile transport, inventory holding, safety stock and damage costs were factored in.
The report noted that MSMEs were hit harder by these add-on costs because they carried tighter working-capital margins and moved smaller, less predictable consignments than large industrial shippers.
How poor rail infrastructure keeps MSMEs off the network
A central finding of the report was that India’s rail freight terminals had split into two distinct tiers.
Private sidings, Inland Container Depots, Private Freight Terminals and the newer Gati Shakti Cargo Terminals had modern mechanisation, warehousing and digital systems, but were mostly built around large, anchor customers.
Common-user goods sheds, the terminals MSMEs typically depended on, remained constrained by poor access roads, limited mechanisation and outdated facilities.
The scale of the mismatch was stark. Private sidings and Private Freight Terminals made up only about 37% of identified terminals but handled roughly 70% of inward and 72% of outward rail traffic. Goods sheds, which accounted for 63% of terminals, handled just 23% of inward and 19% of outward traffic. On average, a private siding or PFT moved about 0.83 million tonnes per annum (MTPA) of inward cargo, compared with only 0.16 MTPA for a goods shed.
Wagon shortage adds to India’s rail freight challenges
Even where terminals worked, the report said wagon shortages were a separate barrier. Indian Railways’ active wagon fleet grew from 302,663 in FY2021 to 346,366 in FY2025, a compound annual growth rate of about 3%. At that pace, the fleet was projected to fall well short of what the National Rail Plan required as rail’s freight modal share target rises from under 30% currently to 45% by 2050.
The report also flagged that wagon composition had not kept pace with changing freight patterns. Open high-sided wagons used for coal and other bulk minerals still made up 57% of the active fleet, up from 56.1% in FY2021, while the wagon category covering containers, critical for MSME and manufactured goods, had stayed flat at around 8%.
Private manufacturers already supplied about 92% of Indian Railways’ wagons, but the report said the absence of a published multi-year procurement plan was discouraging manufacturers from investing ahead of demand. A three-year wagon procurement plan announced in 2022 had not been updated since.
As per the report, maintenance delays compounded the shortage. The standard turnaround for a periodic overhaul was 6-8 days, the report noted, but actual turnaround could stretch to 14 days; routine overhauls meant to take 24 hours could take up to two days.
Why MSMEs are not using Indian Railways’ freight schemes
Indian Railways already offered products such as mini rakes, two-point rakes and multi-point rakes that let smaller shippers book less than a full rake, normally 42 to 59 wagons, carrying 1,300 to nearly 3,800 tonnes of cargo. But these came with restrictions, including minimum wagon requirements and distance caps between loading points, along with supplementary surcharges of 5% to 20% on the base freight rate between October and June. The report said these conditions had kept uptake of the products low among small shippers.
How Indian Railways could unlock Rs 8,700 crore from MSME freight
The report estimated MSMEs represented a serviceable obtainable market of about 100 million tonnes of annual freight for Indian Railways which is roughly double the current loading in the wagon category used for bulk commodities such as coal.
Capturing this volume, at an average lead distance of 500 km, could generate an estimated Rs 8,700 crore in additional annual revenue for Indian Railways and cut freight-transport emissions by about 4.5 million tonnes of CO2 equivalent a year, the report stated, citing India-specific freight emission factors.
