Indian Railways, which contained growth in expenditure to 5.4% in the last financial year mainly by curbing operational expenses, is looking at slashing the outgo on diesel purchases by Rs 1,500 crore or 9% this year. The transporter, which spent Rs 17,500 crore on diesel in FY16, will import crude oil directly and \u201cblock\u201d some refining capacity with state-run Indian Oil Corporation (IOC) to procure the fuel with reduced tax outgo. Besides, it will install auxiliary power units in goods trains to reduce diesel consumption. The transporter spent about Rs 31,000 crore or 18% of operational expenses for fuel \u2014 including electrical traction \u2014 last year. According to a rail ministry official, a joint working group has been set up with IOC to lay down the modalities for purchasing crude and making available the refining capacity for the transporter under an exclusive arrangement. \u201cAfter taking into account all the logistical issues and refining costs, we have arrived at the conclusion that such a move will help us cut diesel procurement cost by 15%,\u201d the official said. The transporter procured 2.8 million kilolitres of high-speed diesel in FY16. A senior official at IOC said the mechanism being mulled by IR is a viable one. \u201cThe joint working committee is also in talks with different states to understand if such a move would require any tax exemptions or concessions from their part. IOC will be bringing in the crude oil for IR, we are currently exploring different models and are also discussing how the by-products of the crude oil will be utilised,\u201d the IOC official said. \u201cThough this is largely a tax arbitrage, the railways being a commercial organisation has every right to save on its operational expenses in order to invest more on the capital side,\u201d said Abhay Krishna Agarwal, partner, infrastructure & PPP at EY. Although official sources refused to elaborate on the tax arbitrage, sources said the railways could save on state-level value-added tax (VAT) as it would shift from a buyer status due to the arrangement with the oil company. Railway officials claim that installation of auxiliary power units in freight trains would lead to the transporter saving more than Rs 3 lakh per locomotive annually. \u201cThe engines of a standby goods locomotive can't be switched off as we need to keep an optimum air pressure for the brakes. In standby mode, a loco burns more than 25 litres of diesel per hour. The new auxiliary power units installed only burn around 3 litres of diesel per hour,\u201d a Railway Board member said. The transporter has installed these auxiliary power units in more than 200 diesel locomotives and has floated a tender for installing them in 500 more locomotives.