introduction - a reservoir of indian theses @...

Introduction

IR, the world’s third largest network and one among the largest

employers, has been contributing to the industrial, economic and social

development of the country. It faced a severe financial crisis in 2001 which

resulted in abnormal hike in freight rate. This coupled with lack of customer

oriented services, led to giving up of its market share to roadways. However,

certain measures taken to control cost and increase revenue brought IR from the

acute financial crisis to a noticeable success in 2005-06, which is technically

known as ‘turnaround’. It had great relevance because the Railway was on the

verge of bankruptcy in 2001 and the turnaround was achieved without pinching

the rail users by increasing fares and at the same time upholding its social

obligations by offering concessions to the privileged classes.

The then Minister in the Budget speech 2001-02 stated that ‘Railways

need to develop market oriented and customer friendly outlook due to emerging

Chapter 3

70 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway

competition within the transport sector.’ The subsequent Railway Minister also

underscored this policy in his first Railway budget speech in 2004. The Minister

stated: “with a commercial orientation, aggressive marketing and economy

measures, the Railways would be continuously working towards further

improving its financial performance. Railways have initiated many policy

changes to meet the requirements of its customers, be it freight or passenger

services. While continuing the process of reforms, other priority areas will be:

improvement in passenger amenities, control over expenditure and stepping up

of measures to prevent leakages of revenue” (Budget speech 2004). From these,

it can be observed that railways have been developing and continuing strategies

for improving their financial performance after 2001. All these culminated in

the financial turnaround in 2005-06.

3.1 Turnaround - The Concept

A venture is said to be turned around when it has recovered from a

decline that threatened its existence to resume normal operations and achieve

performance acceptable to stakeholders, through reorientation of positioning,

strategy, structure, control system and power distribution (Pradeep

Khandwala 2000). This definition implies that a declining firm can be

rescued, while a firm that has failed cannot be.

Nursing a sick company back to health requires a highly effective

turnaround plan involving three steps viz; (Dr. Mike Teng 2008)

Surgery- improves cash flow by restructuring the organization and

putting a full stop to the unnecessary expenses.

Resuscitation- injects new business income streams and boost existing

sales to increase profit.

Turnaround in Indian Railway

Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 71

Nursing: - strengthen corporate structure and team to build a strong

and healthy corporate immune system to sustain long term growth.

There are so many symptoms for the turnaround. Once it is diagnosed,

the turnaround measures are to be taken with immediate effect to rescue it.

3.2 Turnaround Strategy

The specific path of action chosen by the firm to achieve its objectives is

referred to as its strategy. Strategy of an enterprise consists of what management

decides about future direction and scope of business. A turnaround strategy

requires four guiding Cs, namely, Communication, Concentration, Cost Control

and Cash flow. It is a river in which large number of currents, some horizontal,

some sideways, some vertical, some diagonal are interacting with and influencing

one another. (Pradeep Khandwala 2000)

The turnaround strategy is called for, when there is a substantial and

sustaining downtrend in the indicators of business performance. In specific

terms, turnaround strategy means those strategies through which a firm remains

competitive in the market. Enfield India emerged a transformational turnaround

through staff participation and benchmarking studies with excellent competitors,

analysis of past information etc. ( Pradeep Khandwala 2000). The symptoms of

IR’s declining trend were diagnosed as high operating ratio due to increased

operating expenses, lack of co-ordination between various departments, under-

utilization of assets, lack of strategic thinking by top management, unsuccessful

Research and Development (R&D) department and the like. In this context, the

researcher attempts to find out:

What was the position of IR before the turnaround?

Whether a turnaround has really occurred in IR in 2005-06 and if so, what

resulted in turnaround?

Chapter 3


3.3 Scenario before Turnaround in IR

In the early days of company owned railways, profit making was the

ultimate aim. However, after independence, profit making was done along

with social obligation. To look into the scenario before the turnaround and

after nationalization, the efficiency indices of operation of all tractions from

the plan period till the operational crisis in 1980 are given in table 3.1.

Table 3.1: Efficiency Indices of Operation from 1951 to 1981(` in millions)

Efficiency Index 1950-51 1960-61 1970-71 1980-81 Passenger earnings 978 1316 2955 8275

Goods earnings 1430 2861 6182 15509

Working expenses 2157 3726 8622 25760

Net revenue receipts 476 879 1447 1275

Operating ratio (%) 80.0 78.8 84.1 96.1

Net tonne km per wagon day(thousands) B.G M.G B.G M.G B.G M.G B.G M.G 710 304 998 405 908 524 986 522

Wagon turnaround (days) 11.0 6.7 11.2 8.8 13.3 10.1 15.2 15.3

Source: Annual Reports of IR for various years.

Both Goods earnings (from ` 1430 to 15509 millions) and Passenger

earnings (from ` 978 to 8275 millions) multiplied manifold during the

period. During the period, the working expenses increased from 2157 million

to 25760 million. This indicates the necessity for cost reduction/

improvements in revenue for its survival. Operating ratio of 80 per cent in

1950 peaked to 96.1 per cent in 1980 shows a negative growth when

compared with revenues and expenses. Net ton km/wagon day for both BG

and MG lines increased considerably during the period. Wagon turnaround

increased from 11 days in 1950 to 15.2 days in 1980, which indicates that

wagons were not properly and efficiently utilized. All these resulted in

operational crisis of 1980.



3.3.1 Operational Crisis During 1980s

The study reveals that after nationalization, the following

technological imbalances existed in goods train operations:-

The old wagons were fitted with failure prone and inefficient vacuum

brake system.

Goods were accepted in both wagon and train loads. Frequent

shunting was required because of piecemeal movement of wagons.

This created operational inefficiencies.

Frequent examination of trains at an interval of every 400 km resulted

in undue delay.

Steam engines required repeated halts for operational needs like coal

and water refills and change of crew.

Many of the lines were M G and some were uneconomic branch lines.

All these caused delay in freight operation and reduction in revenue,

which eventually resulted in the operational crisis in 1980.

Sri. M. S. Gujral, the then Railway Board Chairman, initiated new

measures to increase operating efficiency by separating old & new type

wagons and production of higher capacity air brake wagons and engines,

avoiding the practice of accepting less than train load, introducing the

concept of point-to-point examination of trains, producing high power diesel

and electric locomotives by phasing out steam locomotives and prioritizing

electrification of railway routes (Sudhir Kumar 2009).

These reforms resulted in a four-time increase in operational

performance, especially in freight earnings. He also explored the need to

increase axle load by utilizing the existing assets. However, no follow up

Chapter 3


action was taken for the next two decades due to lack of synergy between the

departments.

3.3.2 Impact of Liberalization on IR in 1990

Liberalization policy of 1991 resulted in removing trade barriers,

reducing tariffs on imports of raw materials and finished goods. However, it did

not result in increase in freight earnings due to insufficient infrastructure

facilities, the conventional approach (low rate for low-priced goods and vice-

versa) of the Railways, competition from roadways, international logistic firms,

shipping industry, low-priced air lines and oil pipelines. Inadequate budgetary

support also aggravated the situation. In order to regain the lost traffic and to

grab the opportunities of liberalization, the Railways planned for expansion of

network by gauge conversion, doubling and construction of new lines.

3.3.2.1. Gauge Conversion

Gauge conversion aims at integrating the remote and far-flung areas of

the country with the national network. In the 1990s, IR was on an expansion

plan of converting Metre Gauge (MG) lines to Broad Gauge (BG). Though the

strategy helped the Railways on a long term basis, the immediate results were

detrimental to the system. Newly converted lines could not handle additional

traffic due to scarcity of BG wagons and coaches. Traffic on these routes was

permitted with several safety restrictions as these lines were constructed hastily

to meet targets, diluting safety rules. The obsession on gauge conversion, which

peaked during 1992-1996, sidelined track renewal of over-aged BG trunk routes.

This affected safety which resulted in increased accidents, compensation and

adverse impact on the financial position of IR.



Figure 3.1: Gauge Conversion during 1990-2000.

3.3.2.2 Doubling

While new lines bring in additional traffic, doubling of tracks eases

bottlenecks in the existing single line route. IR’ growth in doubling of track

was steady over the period of 1990-2000 on an average of 150 km per year.

Figure 3.2: Doubling during 1990-2000

223135

1351

16191805

758

1364

847693

260

0200400600800

100012001400160018002000

kms

year

Gauge Conversion

Kms

209 213 185295

142200

125 160260 220

Doubling

Kms

Chapter 3


3.3.2.3 New lines

It is alleged that the majority of new lines were added not on the basis

of cost-benefit analysis, but on political considerations. The addition of new

lines was comparatively lower in years of 1994, 1996 and 1997 with 18, 54

and 26 km respectively.

Figure 3.3: New Lines during 1990-2000

Analysis of past investments reveals that Railways concentrated on

gauge conversion, doubling, asset replacement and new lines. However, all

these improvements in infrastructure did not reflect much in productivity. It

is alleged that investments were made in politically motivated non-

remunerative projects. The unfavourable political intervention and policy

initiatives for short-term political gains also made the situation worse. The

decrease in the percentage of freight revenue is evident from table 3.2.

107

193

241211

18

145

5426

224

167

0

50

100

150

200

250

300

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Kms

Year

New lines



Table 3.2: Freight Revenue for the Period 1996 to 2000 (`. in crores)

Years Actual Increase % increase

1996 15290 1620 11.85

1997 16668 1378 9.01

1998 19866 3198 19.19

1999 19960 94 0.47

2000 22341 2381 11.93 Source: Annual Reports of IR for various years.

The freight revenue witnessed lowest growth in the year 1999 with

0.47 per cent and it was at the maximum of 19.19 per cent in the year 1998.

The reduction in the marginal increase of freight revenue may be due to the

relative disadvantage of higher freight rate, competition from other modes of

transport and railway’s inability to provide wagons, as and when required.

The reduction was found mainly in respect of the transport of cement,

petroleum, and iron & steel. A perusal into the financial indicators will reveal

the intensity of the crisis. The important financial indicators for the period

from 1996 to 2001 are analysed in table 3.3.

Table 3.3: Key Financial Indicators for the Period 1996 to 2001

Year ending March 1996 1997 1998 1999 2000 2001 Surplus (` in crores) 2870 2117 1535 1399 846 763

Operating ratio* (%) 82.5 86.2 90.9 93.3 93.3 98.3

Net revenue to capital ratio* (%) 14.9 11.7 8.9 5.8 6.9 2.5

Source: IR’s Annual report for various years. * These two ratios are often used for financial performance assessment of the railway sector.

There is a reduction in surplus amount from ` 2870 crores to ` 763

crores in the relevant period due to the steep escalation in working expenses

and reduction in earnings. The Operating ratio increased from 82.5 per cent

to 98.3 per cent and the ratio of Net revenue to capital steeply declined from

14.9 to 2.5 per cent from 1996 to 2001. It is mainly because of the increase in

Chapter 3


working expenses, particularly the increasing burden of non-plan

expenditures like, interest payments and salaries due to the implementation of

V Pay Commission. There was also loss of revenue due to irrational

decisions relating to tariff fixing and investments. Moreover, the budgetary

support from the Central Government has been slashed down from 75 per

cent in the Fifth Five-Year Plan to 23 per cent during the Eighth Plan (Sudhir

kumar et.al). Poor or under investments by the Railways in the past have been

the major constraining factors in improving the physical or financial

performance.(Sudhir kumar et.al) The figures from1950 to 2000 clearly states

that the system faced a very tough situation and was on the verge of

bankruptcy in 2000-01. All these indicate that a crisis was brewing up,

threatening the very existence and survival of IR warranting immediate

initiatives to overcome the crisis.

3.3.3 Handling of the Financial Crisis in 2001

In the Budget 2001-2002, the then Railway Minister commented that

despite a decade of reforms, IR is standing at a junction station; one track

takes them to reforms, revival and rejuvenation. The other track will lead

them to a nowhere- land of crisis and chaos. The Minister decided to take the

right path sooner, rather than later (Sriram, 2009).

During the period, Mr. Nithish Kumar was the Railway Minister and his

tenure was creative, but his ideas were not carried out effectively. Lack of an

effective tariff strategy led to the decline of revenue. To overcome the disastrous

situation, the Government of India appointed an Expert Committee with Rakesh

Mohan, a noted economist and former Deputy Governor of RBI, as the

Chairman. They recommended reduction in the number of employees,

privatizing non-core activities like healthcare, education, production units and



maintenance of trains, corporatizing Railways and establishing independent

regulator for tariff fixing. As a reaction to these reforms, the Railways responded

with a Status Paper (2001) which proposed to corporatize non-core activities,

reduce the staff strength through natural attrition and to consider loans from

World Bank and Asian Development Bank.

To withstand this critical position, IR resorted to myriad steps, with

the following initiatives to start with:-

Unsustainable level of market borrowings to supplement the

reduction in budgetary support.

Under provision towards Depreciation Reserve Fund, Pension Fund,

Capital Fund and Development Fund.(Sriram et.al)

Formation of Rail Vikas Nigam Ltd (RVNL) to carry out the

development process of survey, tendering and construction of new lines.

This was followed by formulating and implementing a number of

strategies aimed at a turnaround in IR.

3.4 Turnaround- A Myth or Fact

IR, from the verge of bankruptcy in 2001, has made a U-turn to

produce a cash surplus of ` 25, 000 crores in a very short period of four years

under the leadership of Mr. Lalu Prasad as Railway Minister.(Sudhir kumar

et.al). Before going in detail regarding the turnaround strategies, the

researcher attempts to look into whether a turnaround happened in IR or not?

A study on the financial indicators after the crisis in 2000-01 shows

symptoms of a turnaround in IR. The important financial indicators are

analyzed from 2000-01 to 2007-08. Though the period of study is from 2000-

Chapter 3


01 to 2009-10, for the purpose of analysis to identify the turnaround, the

years 2008-09 and 2009-10 are excluded because the financial indicators

during these two years show a reversal of turnaround. This may be due to

change in the political leadership and resulted change in policies coupled

with the steep escalation of fuel cost and staff cost (Mathur 2008).

The scale of financial transformation of IR measured on key financial

indicators is exhibited in table 3.4. Table 3.4: Financial Indicators for the Period 2000 to 2008

Financial Indicators 2000-01 2007-08 Change Cash surplus before dividend (` in crores) 4790 25006 5 times increase

Operating ratio (%) 98.3 75.8 22% decrease

Ratio of Net Revenue to Capital (%) 2.5 20.7 18% increase

Source: Finance (Budget) Directorate, Ministry of Railways.

During the eight year period under computation, a considerable

improvement is seen in Cash surplus, Operating ratio and Ratio of net

Revenue to capital. A five time’s increase in Surplus and 18 per cent increase

in Net Revenue with a 22 per cent reduction in Operating ratio are the

manifestation of turnaround in IR revealed by Table 3.4. However, to

pinpoint the period at which it has taken place, year-wise analysis is required.

In this regard, the performance indicators are analysed from 2001 to 2008,

segregating into two period’s viz. 2001-04 and 2005-08. This segregation is

done as major policy changes were initiated under the leadership of Mr. Lalu

Prasad in 2004-05 and financial improvement coincided with the change for a

significant turnaround in IR. Table 3.5 shows the comparative performance

during the said two periods.



Table 3.5: Performance Indicators of IR from 2000 to 2008 (`in crores)

Pre- period Post-period

Item

2000

-01

2001

-02-

2002

-03

2003

-04

% ch

ange

2004

-05

2005

-06

2006

-07

2007

-08

%ch

ange

Goods Revenue 23305 24845 26505 27618 18.51 30778 36287 41716 47435 54.12

Passenger Revenue 10515 11196 12575 13298 26.47 14113 15126 17225 19844 40.61

Total Revenue 35288 37858 41148 42842 21.41 47038 54404 62371 71645 52.31

Total Working

Expenses 34667 36293 38026 39483 13.89 42759 45574 49047 54462 27.37

Operating Ratio

(%) 98.3 96.0 92.3 92.1 ----- 91.0 83.2 78.8 75.8 -------

Source: Statistics and Economics Directorate, Ministry of Railways, 2001-2008

From the year 2001 to 2004, Goods revenue registered a growth of

18.51 per cent and Passenger revenue with a growth rate of 26.47 per cent.

However, during the period 2005 to 2008, Goods revenue rose to 54.12 per

cent and Passenger revenue to 40.61 per cent. These changes resulted in an

increase of total revenue from 21.41 per cent to 52.31 per cent during the

relevant period. When Total Revenue in 2005-06 registered an increase of

7344 crores (15.66%) compared to 2004-05, the Total Working expenses

increased only by 2815 crores (6.58%). With the result, Net Revenue

increased and the Operating ratio declined from 91 per cent to 83.2 per cent.

The efficiency improvement is evident from the diminishing operating

ratio, which was 98.3 per cent in 2000-01, improved to 92.1 per cent in 2004-

05 and reached 75.8 per cent in 2007-08. Operating ratio shows the

relationship between total revenue and total working expenses or it indicates

the cost incurred to earn one rupee of revenue. Hence, the performance

indicators also indicate that a turnaround has taken place during 2005-08.

The total Working expenses also increased from 13.89 per cent to

27.37 per cent during the period. However, the increase in working expenses

is relatively less than the increase in revenue compared to the previous

Chapter 3


period. Along with financial and performance indicators, different elements

of working expenses are also to be analysed to find out the extent of cost

control. Hence the same is attempted.

3.4.1 Analysis of Working Expenses

Working expenses are directly related to the running of railways and

represent mainly the expenditure on operating expenses, repairs and

maintenance of railway infrastructure, staff welfare and expenses relating to

security and payment of interest component of lease charges. Other

miscellaneous expenditure like expenditure on audit, surveys and

appropriation to Depreciation Reserve Fund, Pension Fund and dividend

payment to General Revenue are included in total expenditure.

Majority of the costs in IR is not fixed by themselves. Employee

salary and benefits are determined by Central Government’s Pay Commission

and diesel prices by a combination of international crude prices, government

subsidies and general inflation. However, by increasing efficiency in

operation of trains and reducing idle time of employees, these two costs can

be controlled to a certain extent. It has been estimated that the pension cost as

a percentage of operating expenses has increased to around 14 per cent in the

last two decades, eroding the operational efficiency of the Railways (Sriram

et.al). However, the new Pension policy has eased the situation.

Railways have low variable cost and high fixed costs. Cost is

insensitive to the load hauled by trains or to the length of trains. The

incremental cost in increasing the length of train is less compared to

incremental revenue from it, as longer trains continued to use the same

engine, track, driver and the crew. Therefore, unit cost per passenger

declines. Hence, Railways could increase its profitability by carrying more



volume. To achieve the turnaround, IR concentrated on increasing revenue by

expanding volume along with reduction in cost through the effective

utilisation of assets.

Figure 3.4: Composition of Working Expenses

Source: Annual Report of IR, 2010.

Figure 3.4 shows that 49 per cent of the total expenses represent

expenditure on staff, followed by fuel expenses constituting 20 per cent.

Table 3.6 shows year-wise growth in Working Expenses.

Table 3.6: Increase in Ordinary Working Expenses from 2000-01 to 2007-08

Years Ordinary Working Expenses* % increase

2000-01 34939.72 100

2001-02 37020.28 105.95

2002-03 38911.24 111.37

2003-04 40432.13 115.72

2004-05 43773.03 125.28

2005-06 48309.63 138.27

2006-07 50332.71 144.06

2007-08 54942.55 157.25 Source: Statistical Summary of IR. *Working expenses exclude depreciation and miscellaneous expenses.

Composition of Working Expenses

49%

20%

17%

14% Staff costs

Fuel

Stores and others

Lease charge&depreciation

Chapter 3


Working Expenses during the period 2000-2004 showed an increase of

25.28 per cent, (125.28-100) which has been further increased to 57.25 per cent

(157.25-100) during the period 2004-08. To understand the component-wise

expenditure variation during the turnaround period from 2004-05 to 2008-09,

growth in components of working expenses is examined in table 3.7.

Table 3.7: Growth in Components of Working Expenses (`. in Crores)

Item 2004-05 2005-06

2006-07

2007-08

2008-09

2004-09 CAGR%

00-04 CAGR%

Staff cost 14667 15630 16557 18108 28029 15.6 3.1 Fuel cost 8763 10201 11258 12122 13847 11.9 10.2 Material cost 2317 2676 2892 2978 3449 10.1 0.8 Lease charges 3592 1979 2099 2366 3168 -0.5 7.2 Other cost 4050 4544 4627 5459 5856 9.1 9.1 Total 33389 35030 37433 41033 54349 12.1 5.7

Source: White Paper, IR, 2009 p.40

The staff costs increased considerably in the year 2008-09 due to the

implementation of VI Pay Commission. Fuel bill increased with the increase

in traffic output and with revision of fuel price. Lease charges during the

period shows a decline as principal component of lease charges was separated

and taken out of working expenses in 2005-06. However, the CAG of other

costs remains at same rate in the two periods.

Staff cost is the major expense as far as IR are concerned and its share of

staff cost to Working Expenses and Gross Traffic Receipts is exhibited in table 3.8.

Table 3.8: Proportion of Staff Cost to Traffic receipts and Working Expenses (` in crores)

2001 2008 Staff costs 17861 28029

Gross Traffic Receipts (GTR) 34880 71280

Staff cost as % of GTR 51.2 36.55

Ordinary Working expenses (OWE) 33161 49224

Staff costs as % of OWE 53.86 50.20 Source: Bankruptcy to Billions p.94



The share of Staff costs to Gross Traffic Receipt decreased from 51.2

percent in 2001 to 36.55 per cent in 2008 and the proportion of Staff cost to

Ordinary Working Expenses reduced from 53.86 percent in 2001 to 50.20

percent in 2008. This is primarily on account of increasing volume and

earnings together with reduction in unit cost. The proportion of Staff costs to

expenses remains stable, their share as a percentage of revenue has declined

sharply from 51.2 per cent to 36.55 per cent. There was 140 per cent increase

in wages and pension liabilities, from ` 19,595 crores in 2003-04 to

` 47,168 crores in 2009-10 (Sriram 2009).

As Government accounts are not maintained on accrual basis, provision

for enhanced salaries and pension as a result of VI CPC though applicable

from 1.1.2006, were not made in the accounts of 2005-06 to 2007-08. The

implementation of the recommendations for the VI CPC began from 1st

September 2008 and the impact of enhanced payment of salaries and pensions

along with arrears had to be absorbed in the years 2008-09 and 2009-10.

In this context, the employee productivity is also to be analysed by

taking NTKM and PKM during the period under study. Table shows that

man-power productivity has steadily improved over the years.

Table 3.9: Employee Productivity

Employee Productivity

(NTKM+PKM/employee)

2004-05 2005-06 2006-07 2007-08 2008-09

0.69 0.75 0.84 0.93 1.01

Source: White Paper, IR 2009.

The Compounded Annual Growth (CAG) table compares the growth

in earnings and expenses over the nineties that led to the financial crisis in

2001 and the transformation after 2001.

Chapter 3


Table 3.10: Compounded Annual Growth Rate of Expenses and Earnings (` in Crores)

Expenses/ Earnings 1991 2001 2008 1991-2001 CAGR (%)

2001-2008 CAGR (%)

Total working expenses 11,554 34,667 54,462 12. 01 6.67 Gross traffic receipts 12,096 34,880 71,280 11.17 10.85 Passenger earnings 3148 10,481 19,784 12.82 9.50 Goods earnings 8408 23,045 46,429 10.70 10.69 Other coaching earnings 336 764 1800 8.56 13.02 Sundry earnings 242 703 2565 11.25 20.31

Source: Statistics and Economics Directorate, Ministry of Railways.

After 1991, the Railway’s expenses (12.01%) grew one percent faster

than its earnings (11.17) leading it towards bankruptcy. However, between

2001 and 2008, the Railways have become solvent by inverting this

relationship i.e., earnings (10.85%) grow four percent faster than expenses

(6.67%). Earnings have grown on account growth in freight volume,

differential price hikes etc. and working expenses grew at a lower rate due to

low inflation and relatively inelastic cost structure in relation to volume

transported.

To evaluate the efficiency of improvement in operating performance,

Operating ratio and net revenue to capital was analyzed and is shown in table 3.11.

Table 3.11: Operating Ratio and Ratio of Net Revenue to Capital

Year Operating Ratio (%) Ratio of Net Revenue to Capital (%) 2000-01 98.28 2.5 2001-02 96.01 5.0 2002-03 92.31 7.5 2003-04 92.16 8.0 2004-05 91.02 8.9 2005-06 83.72 15.4 2006-07 78.68 19.0 2007-08 75.94 20.7 2008-09 90.46 8.8 2009-10 95.28 5.3

Source: Explanatory Memorandum of Railway budget, 2009-10



The efficiency improvement can be evidenced from the diminishing

Operating ratio, which was 98.28 per cent in 2000-01, brought down to 75.94

per cent by 2007-08. Change in Operating ratio is also influenced by change

in accounting practice. The reduction in operating ratio is achieved through

reduction in operating expenses and improvement in gross revenue receipts.

Expenditure reduction is achieved through improvement in technical

efficiency, better labour productivity, vacancy freezing and better utilization

of existing capacity. Obviously, there occurred a turnaround and had a

dominant role in the effective utilisation of assets. In 2005-06, the

momentum of turnaround was noticed in railways. All these indicate that a

turnaround in IR started taking place during 2005-06 and lasted till 2007-08.

Therefore, turnaround was a fact and not a myth. However, there has been a

reversal of the performance from the year 2008-09.

3.5 What Caused the Turnaround?

IR could make a dramatic turnaround with the same employees and

assets. The turnaround strategy has been based on simple principles to have

higher freight volumes, improve occupancy in passenger trains, control costs

and at the same time maintaining low tariffs. Applying these principles,

Railways have improved their market share and operating margins. The

Government was praised for improving customer services and reducing

passenger fares, particularly for poorer sections of society. Railway reforms

have been introduced without losing sight of our social obligation. This is

what we call “inclusive growth.”(Budget speech, 2005-06).

Turnaround means sudden or surprise change and is not only due to

significant growth in economy but it coincides with Mr. Lalu Prasad’s

presence and railway officials called it as ‘turn around’(R.N. Misra 2009).

Chapter 3


Three accounting policy changes made by IR increased its surplus by

` 2689.97 crores in 2006-07. (‘Organiser’ 2010)

A case study by two scholars at Australia’s Canberra University

pointed out that certain changes in accounting of lease charges for

locomotives and wagons reduced operating expenses and increased surplus to

26 per cent in 2006 (Desh Gupta 2007). It is felt that railway accounts are

non-transparent and non-comparable with any standard corporate profit and

loss account. There is no transparency in accounting of cost and revenue for

each and every activity.

All these reports point out that turnaround in Railways was due to

many factors viz. marketing strategies for inclusive growth along with

increase in revenue and reduction of cost, boom in economy, change in

accounting policies and the leadership qualities of the then Railway Minister.

The Minister for Railways during the turnaround period took many pragmatic

decisions for revival of Railways, consistency in direction and ensured timely

and effective follow-up till the desired results were obtained. The Minister

always refer IR as ‘sone ki chidiya’ or a ‘golden bird with great potential’

and this was the first step in reinstating confidence among employees.(Sudhir

kumar et.al).

During his tenure, each and every aspect of revenue and costs was

analysed to study what is lacking, where and how the costs can be reduced as is

evident in turnaround strategies. He adopted the policy of outsourcing of non-

core activities, (retrenchment), differential pricing for value added services

(repositioning) and decentralisation (reorganization) (Desh gupta et.al)

The effectiveness of each strategy in the passenger and freight segment is

analysed to see that whether it increased the revenue and/or reduced the cost



and has it contributed to the turnaround. The strategies identified mainly

focused on:-

3.5.1 Effective Utilization of Assets

The main assets of IR consist of track, bridges and rolling stock. The

effective utilization of assets is made to enhance the revenue and also to

minimize cost, which is within the control of the system. Revenue

enhancement is done by effective utilisation of available assets like,

locomotives, wagons, coaches, brake van, parcel vans and railway land. Asset

utilisation indices are wagon utilisation, track utilisation and engine

utilisation indices. Wagon utilisation is measured in terms of Net Ton

Kilometre (NTKM) / Wagon/day, Wagon km/wagon/day and wagon

turnaround. Track utilisation is measured in terms of NTKM/ route km,

Passenger Kilometre (PKM)/ route km. Engine utilisation measures are

NTKM/engine Hr and PKM /Engine Hr.

Table 3.12: Asset utilization indices from 2000-2010 (BG only)

Year Wagon utilisation Track utilisation

(in millions) Engine

utilisation NTKM /

Wagon/day Wagon turnaround

(in days) NTKM/

route km PKM/ route

km NTKM/engine Hr

2000-01 2042 7.5 6.96 9.49 12850

2001-02 2223 7.2 7.38 10.13 13842

2002-03 2468 7.0 7.74 10.52 14086

2003-04 2567 6.7 8.14 10.76 16776

2004-05 2677 6.4 8.57 11.51 16995

2005-06 2723 6.08 9.05 12.16 18830

2006-07 2960 5.49 9.64 13.47 18691

2007-08 3238 5.23 10.19 14.63 19021

2008-09 3539 5.19 10.43 15.53 19342

2009-10 3762 4.98 11.07 16.35 19086

Source: Annual Year Book of IR for various years

Chapter 3


Table shows that NTKM/Wagon/day was on a steady increase

particularly after the turnaround period. Wagon turnaround decreased from 7.5

to 6.4 days during the period 2000 to 2004 and again decreased to 4.98 days in

the year 2009-10. This indicates that wagons are effectively utilised. The density

of traffic keeps on increasing as NTKM/route km and PKM/route km was on the

rising trend. Engine utilisation also shows an increasing trend throughout the

study period. All these reveal that assets were efficiently utilised.

Effective utilisation of assets directly affects revenue from goods and

passenger traffic. Total revenue comes from goods traffic, passenger traffic, other

coaching (which include parcel and luggage), sundry, and miscellaneous.

Goods, passenger and other coaching earnings are generated from

day-to-day operations. Sundry earnings include rent, catering receipts,

interest and maintenance charges from outside bodies, commercial utilisation

of land and air space and commercial publicity on rolling stock and station

buildings. Other miscellaneous receipts include receipts of the Railway

Recruitment Boards from sale of application forms and examination fees,

Government’s share of surplus profits, subsidy from general revenues in

respect of dividend relief and contribution from Central Road Fund for

financing safety works. Out of the total receipts, 64 per cent constitute

freight, 31 per cent from passenger traffic and the remaining 5 per cent from

sundry and other coaching earnings.



Figure 3.5: Composition of earnings

Source: Annual Report, 2010, Ministry of Railways

3.5.1. A) Goods traffic Earnings

Freight business can be segmented into bulk commodities and other

cargo. IR have become the dominant carrier of bulk commodities especially,

coal and iron ore. The majority of freight comes from mines to industries (51

per cent of total traffic) and from industries to distribution centres. (28 per

cent of total traffic)

The growth of freight earnings in absolute and relative terms during

the decade 2001-2010 is analysed in the table 3.13.

Table 3.13: Growth of Freight Earnings

YEARS 200-01

01-02

02-03

03-04

04-05

05-06

06-07

07-08

08-09

09-10

*Earnings (`in crores)

23045 24845 26505 27618 30778 36287 41073 46426 51749 56912

Growth (%) 6.60 6.70 4.20 11.40 17.90 13.10 13.03 12.95 9.98

Tons (m) 474 493 519 557 602 667 728 794 833 892

Growth (%) 4.00 6.20 7.30 8.10 10.80 9.10 9.05 4.91 7.08

NTKM (m) 312 333 353 381 407 441 481 523 552 601

Growth (%) 6.70 6.00 7.90 6.80 8.40 9.00 8.70 5.54 8.88

*Earnings include wharfage and demurrage. Source: Annual Reports Ministry of Railways.

Freight64%

Passenger31%

Miscellaneous5%

Chapter 3


Table 3.13 shows that growth per cent in freight earnings gradually

improved from 4.2 per cent in 2003-04 and reached at 17.9 per cent in 2005-

06. Despite an increase in freight earnings gradually over the years, the rate

of growth fell off from 17.9 per cent in 2005-06 to 9.98 per cent in 2009-10.

Similar is the case with tons carried. In case of tons carried, there was a

sudden decrease in the growth rate in 2008-09. Between 2005-06 and 2009-

10, there was a sudden increase in rate of earnings, (56.8%) tons carried

(33.7%) and in NTKM (36.28%). Freight traffic in IR has grown in the last

five years. Therefore, it is clear that the increase in the volume of freight

traffic is a symptom of turnaround in IR. The major strategies which resulted

in increased freight revenue are:-

a) Increased axle load

b) Reduced wagon turnaround, and

c) Market oriented tariffs and schemes.

Railways have a competitive edge in freight, because of their ability to

carry large loads over long distances. Moreover, freight is non-political in

nature, which can be managed on commercial principles. In Railways, costs

are sensitive to train kilometre rather than passenger kilometre or ton

kilometre. (Business Line 2009) Therefore, to increase the efficiency, there is

a dire need to increase the yield per train in terms of train km. To increase the

yield per train, the strategy adopted was to make the goods trains run heavier

and faster.

a) Heavier- Increasing the axle load

The strategy is otherwise called ‘overloading of wagons’ has

contributed significantly to the turnaround of IR as the then Minister of

Railways stated ‘One ton extra loading per wagon implied additional revenue



of ` 500 crores per annum (Budget speech 2006). Axle load is the maximum

weight of an axle permitted on a given track and is a governing parameter for

rolling stock and track design.

An increase in the permitted axle load has direct impact on the inner

strength of tracks and sleepers, stress on bridges, strength of wagons, hauling

capacity of engines on freight train loads and gradient of tracks. However, for

implementing the decision of overloading, the co-ordination of three

branches of train operation is required viz. Mechanical branch - that looks

into the safety and maintenance of wagons, Engineering branch - that ensures

the fitness of tracks and bridges and the Operating branch - that decides the

path and running priorities of trains.

Prior to the action of the three branches of execution, the concerned

authorities viz. Railway Board, Railway Minister, RDSO and the

Commissioner of Railway Safety have to consent the operation with regard to

the increased axle loading. Sri. M.S. Gujral, the dynamic Chairman of

Railway Board in 1980, proposed an increase in axle load for better

throughput. After his tenure, the initiative taken by him was dropped on the

ground of safety.

Before putting the order for increasing the axle load during the

turnaround period, the then Railway Minister visited the coal and iron ore

loading points in South Eastern Railway and detected unauthorized overloaded

wagons (R.N. Misra 2009). The wagons that were expected to carry 58 tons

were overloaded by 2 to 15 tons. To arrest leakage of revenue to IR, the

Minister ordered to install more number of weigh bridges at these loading

points. Moreover, the incident was an eye-opener to all those who were

doubtful of the safety aspects affected by authorizing increased axle loads. The

Chapter 3


axle load initiative has increased the Carrying Capacity (CC) of wagons by 7 to

12 percent without any investments in rolling stock, tracks etc.

IR achieved a landmark in crossing 600 million tons of loading for the

year 2005, a 7 per cent growth over the previous year and 20 million tons

over the budgeted expectations. This was partly attributed to the extra loading

that was permitted since September 2004. The strategy helped to carry more

loads per train with the available rolling stock resulted in increase in revenue

and reduction in cost.

The efficiency improvement in freight loading due to increase in axle

load is given in table 3.14.

Table 3.14: Efficiency Improvement in Freight Loading ( in tons)

Item Earlier New Proposed Axle Load 20 23 25

Tare weight 22 22 22

Pay load 58 68 78

Total Weight/ Wagon 80 90 100

Wagon per trains 58 58 58

Total pay load 3364 3944 4524

Source: Bankruptcy to billions 2008, p. 64

Table 3.14 shows that with an increase in axle load from 20 tons to 23

tons, payload increased from 58 to 68 tons and the total pay load increased

from 3364 tons to 3944 tons. All these happened due to the strategy of

making wagons heavier by increasing the axle load.

To reduce the ill effects due to increased axle loading, the Railway

Board issued special instructions to run the heavy haul trains. These trains are

given priority over other trains and keeping them at signals and receiving on



loop lines were avoided (Raghuram.G 2008). The weight of empty wagon

(tare weight) is 25 ton and which is being reduced by introducing lighter

wagons to increase the load bearing capacity of wagons.

The turnaround strategy on running lengthy freight trains has

benefited the IR in some routes only due to the operating restrictions and

technical difficulties. Double Stack Containers (DSC), i.e. placing one more

container atop another container was introduced in 2006 to justify the need

for carrying more containers per train by using the vertical space.

b) Faster (Reducing the wagon turnaround time)

Wagon turnaround means the average time taken for a wagon to

complete one cycle of loading, or interval in days between two successive

loadings. The strategy of making it faster is aimed at effectively utilising

wagons to increase freight earnings by reducing the wagon turnaround time.

For this purpose, platforms are being lengthened to reduce the detention time

for loading and unloading, handling time of materials is extended to round

the clock to reduce the detention time and extension of the time for issuing of

Break Power Certificate (BPC). Examination of freight trains was usually

conducted after every 4500 km of travel or 15 days whichever is earlier. The

validity for BCN (closed) wagons has been increased from 4500 to 7500 km

or 35 days, whichever is earlier, for tank wagons from 4500 km to 6000 km

and for BOXN (open) wagons, the period increased from 3000 to 4500 km

(Raghuram.G2008). These initiatives have enhanced efficiency and reduced

wagon turnaround time from 7.5 days to 4.98 days during the study period,

which is given in table 3.15.

Chapter 3


Table 3.15: Wagon Turnaround (BG only) Pre-period

YEARS No .of Days 2000-01 7.5

2001-02 7.30

2002-03 7.00

2003-04 6.70

2004-05 6.40

Post-period 2005-06 6.08

2006-07 5.49

2007-08 5.23

2008-09 5.19

2009-10 4.98

Source: IR Year Book of various years.

Table shows that wagon turnaround reduced from 7.5 days in 2000-01 to

6.08 days in 2005-06. The strategic measures taken during the turnaround period

resulted in a further reduction of turnaround period to 4.98 days by 2009-10.

However, the effect of increase in axle load and improving the wagon

turnaround need to be studied scientifically. The ban on overloading in trucks

on roads by Supreme Court in November 2005 also enabled to increase the

rail share of transport. All these strategies, policies and decisions resulted in

an increase in goods revenue and reduction in unit cost. The reduction in cost

and increase in revenue in respect of freight earnings before the turnaround

and after the turnaround is shown in the table 3.16.

Table 3.16: Freight Unit Cost and Revenue (in paisa)

Year Cost per ton km Revenue per ton km 2001 61 74

2004 57 72

2008 54 93

Source: Bankruptcy to Billions p.141.



Table indicates that the freight unit revenue reduced from 74 paisa in

2001 to 72 paisa in 2004. This was due to the reduction in freight rates for

petroleum products and steel, which was inevitable to retain the market share

preventing a shift in mode to pipelines for petroleum products and roadways

for steel. Despite a reduction in unit cost from 61 p in 2001 to 57 p in 2004,

the revenue has declined from 74 p to 72 p. This indicates that the strategy of

reduction in freight rate at that juncture was futile as the demand did not

respond to the reduction in freight. The turnaround strategies taken after 2004

have resulted in growth in freight volume, which, in turn, reduced the unit

costs from 57 paisa in 2004 to 54 paisa in 2008 and there is significant

increase in revenue from 72 paisa to 93 paisa in the corresponding period.

Certain marketing strategies have also supplemented and complimented to

boost the freight revenue.

c) Marketing strategies

A number of incentives and value added services were provided to

include more customers to freight traffic and also to retain the existing

customers. They are as follows:-

a. Long term freight discount- A discount up to 20 per cent during

non-peak season and up to 10 per cent during peak season for a period

of three years is offered to attract new freight customers.

b. Empty flow direction discount- Around 40 per cent of trains return

empty. To ensure better utilization of empty wagons in the return

direction, freight discount of 30 per cent during non-peak season and 20

per cent during peak season is given to ensure better utilization of assets.

c. Loyalty discount- To encourage transportation of finished products like

cement and iron and steel by rail, a loyalty discount of 1 per cent was

Chapter 3


announced during non-peak season, if over 90 per cent of the steel or

cement factory production was transported by rail. If it is more than 50

per cent and less than 90 per cent, 0.5 per cent discount is allowed.

d. Non-peak season incremental freight discount - The demand for

freight transportation is normally less during the period from 1 July to

31 October on account of monsoon. Therefore, a discount of 15 per

cent over ` 5 crores in a month and 10 per cent for incremental

earning of less than ` 5 crores is offered to freight customers as more

than 400 trains remained idle due to lack of demand.

e. Multi rake and Mini rake loading- Cement Companies are allowed

to unload at multiple locations and also offered mini rake loading.

f. Freight Forwarder scheme- Freight forwarder scheme was

announced to increase Railways’ share in the piecemeal traffic

segment, which authorizes a consignor to canvass goods from

different parties and load it to goods train to a specific destination.

g. Dynamic and differential pricing policy - This is based on

affordability principle. Low value commodities like iron ore and

minerals were charged much less than expensive commodities like

steel. Due to the classification and increase in the rate for iron ore, the

earnings have boosted up.

h. Wagon Leasing scheme (WLS) – The scheme aims at introduction

of rakes with the participation of private sector. High capacity

wagons, special purpose wagons and wagons for container movement

are permitted for leasing under this scheme.

i. Liberalised Wagon Investment Scheme (LWIS) - In order to cater

to the increased demand for wagons, IR introduced LWIS on PPP



model. LWIS allows investment by private investors in Special

Purpose Wagons (SPW) and High Capacity Wagons (HCW) to

operate on specific routes or close circuit routes approved by IR.

These wagons are not merged with wagon pool of IR.

j. Terminal Development Scheme. (TDS) – The scheme aims at

developing new railway terminals through investment from private

sector. PSUs, other agencies and end users are permitted to develop

terminals under TDS to address capacity constraints due to

unprecedented growth of freight traffic.

k. Two-leg freight discount scheme- If train load traffic is offered in

covered wagons for both up and down directions, then a discount of

20 per cent in lean season and 15 per cent in peak season is given for

traffic in both the directions.

l. Terminal incentive cum Engine on-Load scheme (EOL) - Engine-

on-load scheme is in the form of a concession given to those who can

load or unload when engine remains to be connected to the wagons.

In addition to better utilization of rolling stock, this strategy helps to

save fuel and manpower cost. This scheme was applicable only in

terminals with mechanical loading facility and was subsequently

withdrawn in January 2009.

m. Liberalised siding scheme. Under the scheme, the cost of removable

superstructure including tracks, sleepers, fastening etc and the

overhead electric equipments shall be borne by the Railways, if the

industry comes up with long term traffic terms for 10 years or more.

The siding owners will be required to bear the cost of land, earthwork

Chapter 3


and the substructure of the work. The freight discount will remain at

10 per cent for a maximum period of 10 years.

n. Freight Operation Information System (FOIS) - Through FOIS,

monitoring the terminal detention of rake and movement of the engine

can be tracked. It facilitates effective utilization of rolling stock and

better wagon turnaround time. With advanced computer technology,

the rake movements are monitored and customers can track their

trains in real time, resulting in efficient management of wagons.

o. Dedicated Freight Corridors (DFC). It is done along the Golden

quadrilateral linking the four metros to reduce the capacity constraints

of the existing Railway network. The project covers 2739 kms

through seven states. The construction work of eastern corridor

started in 2009. It is funded by multi-lateral agencies like Japan

International Cooperation Agency (JICA), ADB and World Bank.

p. Port connectivity projects- New lines were constructed under Public

Private Partnership (PPP) to link ports handling bulk containers, to

major rail junctions.

q. Tariff rationalization- Classification of items reduced from 4000 to

a mere group of 28 items to simplify the procedures and to attract

more customers.

r. Revision of Demurrage and wharfage charges - Detaining of goods

unnecessarily in platforms and sidings is prevented by increasing the

demurrage and wharfage charges. This enables to reduce the dumping

of items on platforms and facilitates free movement of goods and

passengers along the platform. To remove the traffic bottlenecks at

loop lines, half rake to full rake siding facility is provided.



s. Development of Rail side warehouses - With a view to provide

door-to-door transportation, IR and Central Warehousing Corporation

(CWC) initiated a pilot project at White field goods shed at Bangalore

in February, 2002. Under this scheme, CWC built warehouses along

the railway track in goods yards. Rail side warehouses have since

become functional at 11 locations and are under construction at four

locations (IR Annual report 2010).

From the analysis, it is found that most of the strategies had impact on

increase in the freight earnings. Freight earnings increased by busy season

and busy route surcharge and priority mini rakes for small customers, volume

discount for large and long-term freight, loyalty incentive and empty flow

discount. Commodity-wise classification reveals that the increase in earnings

from iron ore loading for export is due to increase in loading and increase in

rate by reclassification. The increase in earnings from cement, raw material

for steel plants and coal was due to increased loading. All these altogether

had a considerable contribution in the turnaround of IR.

3.5.1. B) Passenger Earnings

IR is the largest passenger carrier in the world (Indian Infrastructure

2009). Passenger services are segmented into suburban and non-suburban.

53.49 per cent of passengers are suburban in origin and consists of

commuters in metros like Mumbai, Calcutta, Delhi and Chennai. Non-sub-

urban passengers constitute 46.51 per cent (IR Annual statement 2010).

Out of the total number of passengers, 88 per cent constitute suburban

and ordinary passengers and they contribute only 28 per cent of earnings. The

rest of the passengers constituting 12 per cent are from sleeper and A/C

coaches, which contribute 72 per cent of earnings.

Chapter 3


Suburban passenger earnings of 12.75 p per pkm in 2009-10 is said to

be the lowest amongst other modes of transport (IR Year Book 2010).

Suburban passenger fares were fixed at a very low level in 1950-51 and the

practice has been following till now. However, this can be justified on the

ground that suburban trains in India are the most overcrowded, especially in

cities like Mumbai, Chennai and Kolkata, which is more than four-times of the

coaches’ capacity during peak hours in second classes.

In 2004, IR incurred a total loss of ` 5780 crores in its Passenger

earnings (IR Annual report 2004). As the loss was over forty per cent of the

revenue, the reformers thought for a turnaround in passenger earnings.

Turnaround in passenger segment was more challenging in IR because of

three factors, viz. competition from low cost airlines, higher fare structure in

higher classes and more time of travel. However, it is observed that

upholding social obligations for political reasons seems to be more

dominating in fare fixing, which poses the greatest challenge in turnaround of

passenger segment. In this context, the strategies taken to boost passenger

revenue are analysed.

Strategies to Increase Revenue and Reduce Cost

a. Introduction of longer and additional trains.

b. Adding more coaches responding to the demand.

c. Increase in the charges for cancellation of tickets, tatkal scheme, E-

ticketing and extra charges for tickets booked other than the

originating station.

d. Converting Mail and Express trains into Super fast and imposing a

super fast surcharge on fare.



e. Automatic up gradation- Automatic up gradation is a new scheme

introduced by the Railways in 2007 for the up gradation of full fare

paying passengers (for both Tatkal and General) to the next higher

class against vacant accommodation. It is done randomly by the

computer at the time of release of final charts. Passengers need not

have to pay any extra amount for availing this facility.

The growth in passenger earnings and number of passengers in both

sub-urban and non-suburban is shown in table 3.17.

Table 3.17: Distribution of Sub-urban and Non-suburban Passengers, PKM and Passenger

Earnings

Years

Sub Urban Non-suburban

Pass

enge

r Or

igin

atin

g (m

illio

ns)

Pass

enge

r km

Earn

ings

(in

cror

es)

Grow

th in

ea

rnin

gs

Pass

enge

r or

igin

atin

g (m

illio

ns)

Pass

enge

r km

Earn

ings

(in

cror

es)

Grow

th in

ea

rnin

gs

Tota

l ea

rnin

gs

Grow

th in

to

tal

earn

ings

Pre-period 2000-01 2861 88,872 1091 100 1972 3,68,150 9390 100 10,481 100

2001-02 2998 92,860 1150 105 2094 3,96,040 10,010 106 11,160 107

2002-03 2930 90,260 1230 113 2037 4,24,778 11,310 120 12,540 120

2003-04 2984 95,983 1253 115 2122 4,45,223 12,000 126 13,253 128

2004-05 3147 1,02,759 1341 123 2200 4,71,862 12,731 134 14,072 136

Post-period 2005-06 3310 1,05,218 1371 126 2369 5,09,512 13,709 144 15,080 146

2006-07 3514 1,10,987 1472 135 2750 5,82,867 15,749 164 17,221 168

2007-08 3689 1,19,842 1570 144 2835 6,50,114 18214 189 19,784 194

2008-09 3802 1,24,836 1615 149 3118 7,13,196 20252 209 21,867 216

2009-10 3876 1,30,917 1669 153 3370 7,72,548 21745 223 23,414 232

Source: Annual reports of various years, Ministry of Railway.

Sub-urban earnings grew from 23 per cent (123-100) and Non-sub-

urban earnings grew from 34 per cent (134-100) in the pre-turnaround period

to 27 per cent (153-126) and to 79 per cent (223-144) respectively in the

post-turnaround period.

Chapter 3


For further analysis, passenger revenue in terms of earnings per passenger

km for different classes from 2005-06 to 2009-10 is given in table 3.18.

Table 3.18: Passenger Revenue in Terms of Earnings per Passenger km ( in paisa)

Segment 2005-06 2006-07 2007-08 2008-09 2009-10 Non-suburban: Upper class 102.66 100.97 105.22 106.25 102.72

Second class Mail/Express 27.35 27.09 27.15 27.09 26.19

Second class ordinary 15.22 15.28 15.42 14.86 15.52

Average(all classes) 26.92 27.02 28.02 28.40 28.15

Suburban: (all classes) 12.89 12.76 13.10 12.94 12.75

Overall average 24.50 24.72 25.69 26.09 25.92

Source: Year Book of IR from 2005-2010

It is evident from the table that average earnings of all classes in Non-

Suburban, has shown an increasing trend in the earnings per PKM from

2005-06 to 2008-09, which dropped in 2009-10. Similar trend is found in

Sub-urban segment also. Overall average of these two segments increased

from 24.50 in 2005-06 to 26.09 in 2008-09, which dropped to 25.92 in

2009-10, despite increase in the number of passengers. This drop in revenue

in 2009-10 may be due to further reduction in fare, increased concessions and

with the misuse of Izzat scheme. Hence, boost in passenger revenue is a

manifestation of turnaround occurred in IR.

The loss on passenger segment is reduced by increasing volumes by

increasing the length and occupancy of trains, increasing the number of

coaches, improved design of coaches, and by increasing the speed of trains.

Many committees recommended increase in passenger fares considering the

wide gap between cost of providing service and the return from the same. But

social and political compulsion kept the rate at the low level and the rate was

further reduced by ` 1 each year. It is more prudent that instead of reducing

the fare, the resources mopped up could be used for delivery of better



services to the Sub-urban and ordinary passengers. Passenger unit cost and

revenue is given in table 3.19.

Table 3.19: Passenger Unit Cost and Revenue (in paisa)

Years Cost per PKM Revenue per PKM Revenue deficit 2001 38 23 15

2004 41 25 16

2008 39 26 13

Source: Bankruptcy to billions P.142

Table clearly shows that passenger cost always exceeds the revenue.

During the period, 2001 to 2004, an increase of 3 p in cost resulted in an

increase of 2 p in revenue. This was achieved due to an increase in fare.

However, during the turnaround period (2004-2008), the strategies resulted in

decrease of cost from 41 p to 39 p with a slight improvement in revenue from

25 p to 26 p. The revenue deficit of 15 p in 2001 rose to 16 p in 2004, which

came down to 13 p during the post-turnaround period. This reduction in the

deficit is also a sign of turnaround. Hence, boost in the number of passengers

and earnings with a reduction in cost are a manifestation of turnaround in IR.

3.5.2 Strategy of Outsourcing of Non-Core Activities

In a competitive environment, every organisation tries to concentrate

on their core competency and outsource the non-core activities for cost

reduction and revenue enhancement. As part of turnaround strategy, IR also

adopted the strategy of outsourcing non-core activities, which include service

from brake vans and parcel vans, which are provided in trains for the carriage

of luggage and parcels. Earnings from non-core activities are grouped as

other coaching earnings.

Before the turnaround period, other coaching earnings showed a

declining trend due to non-revision of licensing fees for many years, focus on

Chapter 3


retailing rather than wholesale outsourcing of catering, parcel and luggage

services and uniform pricing for all trains and for all seasons.

The following steps were taken to remove the ill-effects of the state of

affairs:-

a) Leasing of Parcel Services

Under this scheme, parcel space is leased out to private players by

inviting bids through open tenders. Parcel express trains with 15 parcel vans

and a brake van is leased to private operators. In the parcel segment, speed

and reliability have greater effect rather than price. IR have about 800 parcel

vans that are attached to passenger trains and the rates are set in three

categories - highest for Rajadhani and Shatabdi followed by Mail and

Express and ordinary passenger trains.

However, in the parcel business, IR is a station-to-station transporter

and it is not competitive in short distance carriage. On the return trip, the

parcel vans are empty as they are going from production to consumption

centres, which lead to underutilization of capacity. Handling of the catering,

luggage, and parcel services by private parties significantly reduced the

losses incurred by IR in this area, while increasing operating efficiency and

quality of service.

b) Revision in parking fees. It is outsourced to private contractors and there

is revision in parking fees for vehicles parked in railway land which

resulted in huge hike in license fee as a strategy to boost revenue.

c) Improved Catering- Provision of catering in trains has resulted in

providing good meal at reasonable rates in trains, irrespective of the class

in which they travel. Railways have set up IRCTC to provide better

catering to passengers.



In this context, other coaching earnings are analysed after 2004.

Table 3.20: Other Coaching Earnings from 2004-2010

Years Other coaching (in Crores) % growth 2004-05 990.28 100

2005-06 1152.56 116.39

2006-07 1717.73 173.46

2007-08 1800.30 181.80

2008-09 1971.67 199.10

2009-10 2235.72 225.77

Source: Annual Year Book, IR for various years.

Table shows that Other coaching earnings increased from `990.28

crores to ` 2235.72 crores in the turnaround period. (125.77 % increase).

Though the share of earnings from other coaching segment is comparatively

lower, it has greater potential to mobilise revenue. Earlier, it was totally

neglected and during the turnaround period, special efforts were taken to

generate more revenue.

3.5.3 Strategy of Discovering New Source of Revenue

IR has started undertaking new opportunities for increasing revenue.

They include license fee for renting out advertisement space on the interior

and exterior of trains and in the station premises, leasing of land, commercial

publicity at stations through hoardings, glow signboards and other media of

publicity like plasma screens, computerized systems etc. PRS/UTS tickets are

also used for commercial publicity. The Rail Land Development Authority

(RLDA) has been set up for commercial utilization of railway land for

developing railway assets for revenue generation. The Sundry earnings

during the period 2004-10 are briefed in table 3.21.

Chapter 3


Table 3.21: Sundry Earnings for the Period from 2004 to 2010 (` in Crores)

Years Sundry earnings % growth 2004-05 1157.03 100

2005-06 1839.03 158.94

2006-07 1711.70 147.94

2007-08 2565.29 221.71

2008-09 2500.69 216.13

2009-10 2879.68 248.89

Source: IR’s Year Book of various years

The growth of Sundry earnings in the year 2005-06 was significantly

higher at 58.94 per cent because ` 500 crores were realized through a one-

time receipt of registration fees for container routes from private firms. The

Sundry earnings grew from `1157.03 crores to `2879.68 crores during 2004-

05 to 2009-10. The annual growth in 2007-08 had also been high at 74 per

cent as reimbursement of losses on strategic lines was made a part of Sundry

earnings from this year as per the direction of Comptroller and Auditor

General (CAG) adding an amount of ` 637 crores to the year's earnings. The

advertisement and sponsorship revenue from suburban traffic which accounts

for crores of rupees, subsidize the passenger revenue. Out-sourcing of

cleaning toilets to Eureka Forbes and outsourcing of other non-core activities

also boosted the sundry earnings from ` 1157 crores to 2879 crores in the last

four years (White paper 2009).

Though Sundry earnings constitute only an insignificant portion of the total

revenue, improvement in Sundry earnings also contributed to turnaround.

3.5.4 Strategy of Plugging Leakage of Revenue

Loss of revenue occurs due to ticket less travel, fake refunding,

unauthorized wagon loading and inefficient sale of scrap. During the



turnaround period, effective measures were taken to prevent ticketless travel

by preventive checks, minimize unauthorized wagon loading by legalizing

the axle load increase and sale of scrap through an efficient Scrap

Management Cell. All these increased the total earnings to a certain extent

and hence contributed to turnaround.

a) Ticketless Travelling

Ticketless travel results in loss of revenue. Lesser the ticket counters and

TTEs, greater the chances for ticketless travel. Every year, ticket less travel

increases either due to the reduction in the number of ticket counters or on

account of inefficient ticket checking system. Overcrowding in unreserved

coaches tempt passengers to travel by reserved coaches, which may be construed

as ticketless travel. In some cases, the expense incurred on conducting checks

would be more than the revenue earned from it. The revenue has doubled despite

the decrease in number of cases detected. This is due to the increase in the

penalty amount for irregular travel from ` 50 to ` 250.

b) Sale of scrap

Sale of scrap is to be properly scrutinized to prevent the leakage of

revenue. It has got much importance at the wake of the uni-gauge policy

undertaken in the last two decades, which generate huge volume of scrap.

Scrap includes melting scrap, released track, condemned rolling stock,

released materials from redundant sidings etc.

3.5.5 Strategy of Balancing Social Obligation and Commercial

Consideration

Upholding social obligation and aiming at inclusive growth, fares

were reduced and a number of concessions were allowed to the different

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categories of passengers. Fares were consecutively reduced over the years

which affected the passenger revenue. In order to attract more number of

passengers to AC classes and also to regain the lost traffic, the rates in AC

classes were reduced by adopting dynamic pricing policy. Differential

discounts on peak and off peak seasons and superfast charges on second class

tickets were reduced by 20 per cent, i.e., from ` 10 to ` 8. However, on

commercial consideration, to offset this loss, other charges, which do not

affect the common man, were increased over the years.

A number of concessions were allowed to all the travelling classes and

people belonging to different sections of the society. More than 100 types of

concessions are given to passengers of various categories under different

rates. Concessions are granted to 48 categories of people on the basis of class

of travel, age, type of train, social concessions like concessions to cancer

patients, unemployed youth, tourists and differently abled persons and

institutional concessions to students, social organizations and educational

institutions, professional and amateur artists. The concessional group

includes students, senior citizens, patients suffering from major diseases,

persons belonging to unorganized sector, monthly concession on season

tickets for Madrassa students, physically handicapped, freedom fighters,

widows of defense personnel killed in action, distinguished sports and highly

intellectual people honoured with national awards etc. A separate quota has

been defined for cancer patients and their attendants travelling on concession

in more than 200 trains in IR.

Concessions on IR are admissible irrespective of nationality of the person

w. e. f November 17, 1999. All concessions, excepting the concessions for senior

citizens are to be granted across the counters at stations and reservation/booking



offices only. On an average, from an E category station, around 10 per cent of

the monthly earnings are given out by way of different concessions.

Izzat is a concession allowed in the 2008 Railway Budget for people

in the unorganized sector with a season ticket of ` 25 with a monthly income

below ` 1500 for travel up to 100 km. They were allowed to travel only in

passenger trains. However, in the 2009 Railway Budget, it has been

liberalized and the passengers are allowed to travel in all trains including

superfast.

All these reveal that a balancing of social obligations and commercial

considerations was practiced successfully during the turnaround period.

3.5.6 Strategy of Modernisation of Railway Infrastructure

As a part of its capacity enhancement and safety measures, significant

improvements have been made in the infrastructure. IR makes huge

investments to upgrade its technology and modernize the rolling stock,

signalling and telecommunications, tracks and other assets for improving

reliability, safety and operating efficiency. Improvement in safety not only

reduces the damage to assets but limits the disruption of Railway’s

operations, thus increasing punctuality, which in turn improves productivity

and profitability. Public Private Partnership (PPP) is resorted to in the

attainment of the strategic goals in addition to the budgetary and internally

generated resources to cater to the huge investment needed.

Track renewals, gauge conversion and new lines were made annually

and launched Dedicated Freight Corridor in February 2009 (IR Magazine,

January, 2010). Modernization requires the introduction of new technology in

track laying and maintenance, design and maintenance of wagons, production

and maintenance of coaches, construction and strengthening of bridges,

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stations and freight terminals and signalling and telecommunication works

and also certain human resource initiatives. 20,227 route kilometres had been

electrified till March 2010 and 127 sites have been entrusted to the RLDA for

commercial development till February 2009 (IR Annual Report 2010).

Several measures are taken to improve the working conditions of

guards and drivers. Crew-friendly cabins and brake vans are designed, as

fatigue enhances accidents and reduces productivity. Through modernisation,

IR has transformed into value creation and customer satisfaction and in turn,

contributed to turnaround.

3.5.7 Strategy for Improvement in Passenger Amenities

Modernization of infrastructure contributed much to the improvement

in passenger amenities mainly in trains and at stations. However, certain

strategies, exclusively aiming at improvement in passenger amenities were

implemented during the turnaround period. The strategies for increasing

revenue and provision of amenities depend on the market segmentation. The

important strategies to improve passenger amenities are briefly outlined as

follows:-

a) Expansion of computerised PRS and UTS - Both PRS and UTS

help Railways to bring transparency in the accounting pattern and to

generate statistical data with ease. As on 31-3-2010, PRS is available

at 2061 locations; Computerised UTS is available at 3614 stations

with more than 6000 counters (IR Year book 2010). Among these,

some are serving dual purpose of PRS and UTS.

b) Improvement in ticketing service- Though e-ticketing had been

introduced by IRCTC in 2003; it has been popularized during post-

turnaround period. This has reduced the queue at stations and



provided much convenience to the passengers. Janasadharan Ticket

Booking Sevaks (JTBS) provides another easy source of ticketing. In

addition, ATVMs have been installed at 565 locations.

c) Ensuring cleanliness and hygiene- All coaches of Mail or Express

trains inclusive of all pantry cars have to ensure cleanliness and

hygiene. IRCTC have undertaken cleaning of all coaches including

pantry cars during maintenance and off-loading all equipments of

pantry cars once a month to maintain required hygiene. Moreover,

sale of quality food items is made mandatory in all Mail/Express

trains. Improved flooring was provided in all Mail/Express coaches.

Better catering, cleanliness and improved ambience in stations and

trains are provided to all classes of passengers.

d) Improvement in safety measures - Several measures such as

technological up gradation, modern signalling system, reducing

human intervention in operation, better training to improve skills in

operation and maintenance of assets have been undertaken to prevent

collision, derailment, accidents at level crossings and fire in trains

over the years. Periodical safety audits of different divisions by multi-

disciplinary teams of Zonal Railways as well as inter-railway safety

audits are conducted on regular basis. On the employees’ side, Safety

Action Plans to reduce accidents caused by human errors and training

facilities for drivers, guards and other operating staff have been

upgraded.

e) Improvement in Security measures- Railway Protection Force

(RPF), empowered under Railways Act, 1989, has been entrusted with

the tasks of protection and security of railway property, passenger

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areas and passengers, particularly in extremist areas. The Force is to

deal with offences such as alarm chain pulling, roof travelling,

touting, and ticketless travel, unauthorized entry into ladies coaches,

unauthorized vending, and trespass and also with unlawful possession

of railway property. IR has introduced a mobile helpline for

registering complaints of bribery, corruption against railway men.

This facility is available round- the-clock.

f) Other measures for improvement in passenger amenities

i. Modern, cost-effective lighting arrangements for platforms,

booking offices, renovated platforms and pay and use toilets.

ii. Passenger Guidance System including signage and coach

indication boards and installation of 100 escalators at fifty major

stations in a phased manner.

iii. Introduction of Garib Rath and Duranto trains and many pairs of

new trains.

iv. Cyber cafes and ATMs were opened at important stations.

v. Re-designing AC coaches to increase the capacity from 64 to 81.

vi. With the Ministry of Tourism and State Tourism Department, trips

to major tourist destinations through travel packages were made.

vii. Audio-visual passenger communication system like nation-wide

call centres for train enquiry.

After a thorough analysis of various strategies for revenue enhancement and cost reduction, which resulted in turnaround, it is pertinent to examine the changes made in the accounting practices and policies.



3.5.8 Strategy of Change in Accounting Practices

During the turnaround period, some changes were made in the

accounting methods and practices already followed in IR. The major changes

made were:-

Capitalization of the principal component of lease charges paid to

IRFC- Instead of debiting the full amount of lease payment (both

principal and interest) to revenue account, only interest on lease is

debited to revenue account. The principal component of lease charges

paid to IRFC for the purchase of rolling stock is added to the capital

component of lease charges to the Block Account of IR. This change

was carried out with the approval of C&AG, Ministry of Finance and

Railway Convention Committee (Fifth & sixth report of RCC).

Presentation of Financial Performance – During the period, it was

decided to introduce a new format of presentation of railway finances

indicating the cash surplus before dividend and investible surplus in

the Explanatory Memorandum at the time of presentation of the

budget from 2007-08 onwards. International consultants appointed for

ADB financing project pointed out that the Railways' accounts lacked

transparency and readability from commercial point of view.

Accounts maintained as per the requirement of Government

accounting do not reflect the Earnings Before Interest, Taxes,

Depreciation and Amortization (EBITDA), interest earned on Fund

balances, subsidy from general exchequer etc. in a clearly

understandable format.

Accounting of re-imbursement of Operating losses on Strategic

lines- Prior to 2006-07, losses incurred by IR on the working of

strategic lines were being deducted from dividend payable to general

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exchequer (Audit Report 2008). Revenue from operating uneconomic

strategic lines located on the borders of our country is treated as ‘other

income’ and the reimbursement amount for these losses is now

included as a part of the sundry earnings and dividend is shown on a

gross basis. It helps to show actual expenses and income against

specific lines.

All these accounting changes resulted in transparency of accounting

information to exhibit the actual results of business.

3.5.9 Environmental Factors

In addition to the innovative strategies, several macro-economic

environmental changes also favoured the situation. The boom in economy

contributed much to the development of the entire service sector including

railways, also played a role in IR’ turnaround. Indian economy’s annual

growth rate of real GDP during 2005-06 to 2007-08 was around 9 per cent

(Economic survey 2010). The boom in economy raised the demand for

freight and passenger services, which is reflected in higher revenue. With the

economy boom, there existed greater demand for coal for electricity

generation, cement for construction and pig iron for steel plants.

Moreover, the Supreme Court ruling in November 2005 which banned

overloading of road transport vehicles, shifted freight business, specifically

cement and steel, to the railways. This shift was echoed in the sharp rise in

freight revenue.

Major strategies, their application and effectiveness are enumerated in

table 3.22.



Table 3.22: Strategies, their Application and Impact on Revenue and Cost Strategies Application Impact on cost and revenue

Freight segment:

1. Effective utilisation of Assets

a) Increased axle load a) One ton extra loading per wagon implied additional

revenue of 500 crores per annum.

b) Reduced wagon turnaround b) Resulted in reduction of cost due to reduced wagon

turnaround time to 4.95 days from 7.5 days.

c) Introduced Market oriented tariffs.

c) Dynamic and differential pricing boosted the freight earnings of low value commodities like iron ore and minerals and some schemes attracted piecemeal transportation.

Passenger segment: d) Longer and additional trains.

e) Adding more coaches responding to demand

f) Increase in other charges like cancellation,

g) Automatic up gradation. h) Dynamic and differential pricing

with substantial increase in passenger comfort.

d) Yield per train increased. e) Exploitation of seasonal demand resulted in increased

revenue f) Helped in balancing social obligation with commercial

considerations. g) Eliminates idle capacity. h) Popularizing Tatkal scheme, Garib rath trains and

advance booking period, seasonal discount for Upper classes of travel. This resulted in boost in revenue.

2. Outsourcing of non core activities like catering and parcel service.

Catering has been given to IRCTC along with its staff and parcel services to private contractors.

Cost reduction and revenue generation

3. Discovering new source of revenue

Advertising in rolling stock and railway premises.

Increased revenue from sundry earnings.

4. Plugging leakage of revenue

a) Intensive ticket checking introduced.

b) Scrap sale through efficient Scrap Management Cell

a) Reduced ticketless travel and increased revenue. b) Increase in scrap revenue.

5. Balancing social and commercial obligations

Reduction in fare and allowing more number of concessions

Attracted more persons to rail travel and which resulted in increased revenue.

6. Modernisation of Infrastructure

Doubling, Gauge conversion, electrification, modernisation of signalling, communication etc.

Improvement in safety, reduction of accidents, maintaining punctuality, reduced cost and increased revenue.

7. Improvement in passenger amenities

a) IT innovations implemented in almost all areas particularly in ticketing,

b) Improvement in service quality for all classes of travel, cleanliness and hygiene, safety and security measures

a) PRS, UTS and e-ticketing and e-payment are highly effective and resulted in reduction in workload of employees. It also helped to reduce the queue at the counter.

b) Attracted more number of passengers for rail travel.

8.Accounting reforms

a) Capitalisation of principal amount. b) Income from uneconomic branch

line is treated as other income c) Presentation of financial

performance.

a) Falsified overcapitalization is removed. b) Helps to show actual expenses and income against

strategic lines. c) More transparent and provides information for both

accountability and decision-making.

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During the period, efforts were taken to grab the opportunities in transport of goods and passengers due to the boom in economy.

In addition to major strategies, there are some minor strategies which enabled railways to increase revenue, improve service quality and contributed to turnaround.

Table 3.23: Minor Strategies and its Impact on Turnaround

1. Running of uneconomic branch lines.

Private parties are not interested, except in lines having tourist potential.

No relevance. Not taken over by private parties.

2. Creation of several Corporations. RITES, RVNL, IRCTC and CONCOR, DFCCIL etc.

Highly effective - Focused on specific operation with government control, helped to reduce cost.

3. GMs are given freedom for initiating new action for revenue generation.

Only a limited number of GMs have utilized this power (e.g. branding of trains in NR and recently by SR)

Highly effective whereever it is practiced.

4. Improved investment planning and selection of projects.

LRDSS (Long Range Decision Support System) needs to be implemented in all decisions.

It is highly effective and should plan new freight lines linking plans of other Ministries. E.g. Port links.

5. PPP cell

For the manufacture of wagons, facilities with PPP.

Not functioning effectively. No strategic policies and decisions- only transactions. Hassan-Mangalore, Mundra and Pipavav. Projects, Wagon Investment scheme were successful.

6. Alliance with Research Institutes and Consulting Associates

Alliance with IIM, Ahmadabad, IIT Delhi, IIT, Kanpur and IIT Mumbai.

It is highly effective in redesigning and simplifying the processes.

7. Dedicated Freight Corridors

In addition to Eastern and Western Corridors, Chennai to Goa and Mumbai to Ernakulum are under consideration.

Most of the DFCs are under construction only. It is expected to be successful on completion.

8. Double-stack containers Introduced in Nehru Port and some other diesel routes.

Highly effective. Saved 7 per cent on capital cost and 25 per cent on operating expenses.*

9. Initiative in safety and security. Anti - collision devices, train warning devices at gates.

Highly effective and number of accidents reduced.

10. Environmental factors

a. Growth of Indian economy, b. Supreme court ban on overloading

of trucks.

a) Rise in demand for transport and increase in exports.

b) Shifted freight traffic from road to rail.

Source: Own compilation *Annual statements of IR, 2008.



All these strategies resulted in organizational turnaround and the

operating ratio decreased from 98.1 per cent in 2001 to 75.8 per cent in 2008

and the net surplus increased from ` 763 crores to ` 13, 431 crores for the

respective period.

Figure 3.6 Conceptual Framework of IR Turnaround

3.6 Sustainability of Turnaround

Turnaround happened in IR did not sustain after 2007-08 due to many

reasons. Though IR had a turnaround, it could not be sustained for more than

three years, despite the initiatives taken by the Railways. The initiatives

focussed on high density routes, linkage with ports and DFCs and passenger

corridors which depend on PPP have not become effective. However, the

changes which are made on the basis of economies of scale, unit cost

strategies, and competition will definitely sustain for the future. The growth

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in road transport is unsustainable not only on environmental and safety

matters, but also in terms of wastage of resources. Axle loading has reached

the maximum and wagon turnaround reached the minimum. With the

introduction of container traffic in rail transport, the lost traffic was regained

to a certain extent.

However, IR being freight oriented railway, infrastructure development

like capacity augmentation, port connectivity and up gradation of track and

rolling stock are not in proportion to the projected growth in freight traffic. The

track structure is unfit to carry freight trains at high speeds and the development

of freight terminals was not in tune with the growth in traffic in certain sections.

Some of the strategies used for turnaround were aimed at short-term immediate

results. Men and machines were over-utilised. Hence, the turnaround did not

sustain. To sustain the turnaround in future, Strategic Business Units (SBUs)

within the organization are to be initiated. DFCs are to be constructed in high

density routes on priority basis. Maintenance of infrastructure is to be done

properly. Improvement in Service quality and boost in employee morale and

motivation is also to be done to sustain the turnaround.

3.7 Present Financial Position of IR

The excess generated by IR has gradually increased from ` 6193.32

crores during 2005-06 to ` 13431.09 in 2007-08 and then sharply fallen to `

4456.78 crores in 2008-09 and further fallen to a deplorable surplus of ` 0.75

crores in 2009-10. As the surplus has come down, the internal resource

generation has been adversely impacted to the extent of ` 1298 crores. The

rapid depletion of cash surplus within a short span of time may be due to the

impact of Sixth Pay Commission and droop in the economy with a decrease



in freight earnings on account of reduction in average lead of freight traffic.

The rise in fuel prices also aggravated the situation.

The three Funds viz. Capital Fund, Depreciation Reserve Fund and the

Development Fund maintained as on April 1, 2008 is wiped out. A reserve of

` 18000 crores are now in the negative balance of ` 21000 crores in 2010-11.

Earnings in all segments- passenger, goods and other coaching – were below

the target during the first eight months of the current financial year (2011-

12). The Ordinary Working Expenses have exceeded by ` 2036 crores. The

implementation of the Sixth Pay Commission had incurred an additional debt

of ` 70000 crores due to the lacuna of the accounting system followed in IR.

All these made IR to face another financial crisis now.

To avert the impending crisis, Comptroller of Accounts and Audit

General (CAG) have recommended rationalizing of freight and passenger

tariffs to improve its finance. Unviable projects are asked to be wound up and

suggested to focus on viable projects. Lack of funds is the major constraint for

speedy modernisation, which is further hampered by diversion of funds to

lower prioritised purposes due to political compulsions. Inordinate delay in

execution of projects is also due to inadequate co-ordination from State

Government, Environment Ministry for clearance of forest land and

availability of land, which contributed to huge cost and time overrun.

Plan outlay has been massively downsized by ` 9079 crores and the

Board has empowered all General Managers to divert funds from one head to

another under the same plan head and allocate funds with priority for safety

and targeted works, in order to ensure better utilisation. Railways decided not

to fund uneconomical projects out of Capital bonds.

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To boost revenue from freight and passenger segment, modernisation

of infrastructure or network is highly required. The urgent need is to

rationalize the heavily subsidised passenger services by increasing the fare.

It is imperative that on the expenditure side, Railway has to improve

productivity reasonably through a number of austerity or economy measures

like better manpower planning, effective asset utilisation and reduced fuel

consumption.

Summary

IR witnessed a turnaround during the period 2004 to 2008, when the

loss-making railway suddenly started making profits on a continuous basis.

However, during the financial years 2008-09 and 2009-10, it took a U-turn

with a sudden increase in the operating expenses mainly due to the impact of

VI Pay Commission and increased fuel price. IR witnessed a dynamic phase

of growth with new initiatives for the effective utilisation of existing assets

and improved technology for offering world-class services in both freight and

passenger transportation during the turnaround period.

After 1990’s the railway’s expenses (12.01%) grew one percent faster

than its earnings (11.17) leading it towards bankruptcy. However, between

2001 and 2008, the railways have become solvent by inverting this

relationship i.e., earnings (10.85%) grew four percent faster than expenses

(6.67%). Earnings have grown on account of growth in passenger earnings,

freight volume, and differential price hikes and working expenses grew at a

lower rate due to inelastic cost structure in relation to volume transported.

Turnaround achieved in the year 2005-06 is admirable in the sense

that it has not taxed the ordinary passengers, at the same time, they are

provided with better services. IR is the biggest passenger carrier in terms of



passenger kilometres and its passenger fare is lower compared to other World

railways. Passenger earnings increase was due to increase in number of

passengers coupled with increase in average rate / PKM, which may be due

to increase of average lead in AC class travel. Second class sleeper also

registered an increase in passenger earnings. A reduction in AC class fare

was offset by an increase in average lead and number of passengers. With a

low fare in passenger segment and a fare reduction continuously for three

years together with maximum utilisation of existing assets, facilitated IR to

make a dramatic turnaround.

The turnaround happened mainly in the freight sector due to the

strategy of increasing axle load coupled with increase in rate/NTKM due to

rationalisation of commodity classification. There was significant increase in

loading and average lead of iron ore, fertilizers and cement. Drop in food

grain movement (both in loading and lead) was offset by increase in

rate/NTKM. Moreover, increase in Sundry earnings was made through areas

of business that has not yet been explored, such as leasing of parcel vans and

commercial advertising and publicity in station premises and rolling stock.

The improvement in financial and operating performance indicators

was mainly due to increase in operating efficiency achieved by maximising

the utilisation of assets along with economies of scale in passenger and

freight operations and reduction in wagon turnaround. The change in

accounting method by excluding the principal amount of lease from working

expenses and the economic condition favoured the situation.

Many experts expressed serious concern about the transformation in

IR stating that it is due to change in accounting policy, boom in economy and

is made at the cost of safety. The study attempts to look into the problem and

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made a thorough analysis of its earnings and cost, changes in accounting

policies, and the managerial approach. The study concludes that along with

other factors, the political leadership during the turnaround period has also

contributed to turnaround. With a strong will and follow-up, the then

Minister has executed all the policy decisions taken by his predecessors to

increase the revenue and to reduce the cost. Consistency of direction and

follow-up made the axle load and automatic up gradation into reality. The

strategies taken during the period were to grab the opportunities in the

transport sector due to the boom in economy.

This turnaround was accepted globally by management students and

business collaborations. IR had signed a Memorandum of Undertaking

(MoU) with the railways of many nations including Germany, Japan, China

France, Italy and Singapore for further progress and development. However,

the turnaround could not sustain for long. A close observation reveals that

some of the strategies which worked out wonders in the short span of time

were not sustainable. It is evident from the reversal of financial performance

by 2009-10. Therefore, if those strategies are reformulated with a perspective

vision and a continuous follow-up, the Railways can now make a second

turnaround.

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