Financial Daily from THE HINDU group of publications
Wednesday, Mar 08, 2006
Logistics - Railways
The freight side story
The Railway Budget has generally been hailed by the industry and public. The adjectives used are `forward-looking, growth-oriented, innovative, pragmatic and user-friendly'.
Largely helped by the economic boom and the decision to go in for heavy axle load, the Railways has posted a healthy growth of 11 per cent in volume. Freight earnings have also increased 17 per cent. Enthused by this positive trend, the reforms initiated in the freight sector have been carried forward.
The situation is akin to the Eighth Plan period, when there was a growth of 12 per cent in traffic earnings and the Railways contributed 58 per cent of the Plan outlay from internal resources. The operating ratio during the period averaged 84 per cent. The setbacks suffered in the middle of the Ninth Plan period, mainly on account of the two-fold increase in staff cost and pension obligation, compounded by sluggish economic growth. This affected Railway finances and it had to defer payment of dividend to the General Exchequer for two years.
Despite the doomsday predictions of many economic experts, the Railways has shown what a focussed strategy on the freight front can achieve.
It must be acknowledged that the General Exchequer's munificence in the form of dividend-free grant of Rs 12,000 crore and the fund internally generated by the Railways of Rs 5,000 crore through safety surcharge had enabled replacement and renewal of assets overdue as on April 1, 2001, in a time-bound manner.
Not only has reliability improved and accidents come down but the flexibility of the system has also been enhanced, resulting in higher throughput. Thus, when the traffic was on offer, the system was able to handle the same without any constraints.
The salient features of the latest Budget are the continued emphasis on rationalisation and simplification of tariff. Rationalisation is an effort to make the rates more competitive and reduce the cross subsidy. The exercise began in 2002-03, when the number of classes was reduced from 59 to 32. The initiative was carried forward by reducing the number to 27, and further to 19, in 2005-06.
The ratio of freight in highest class to lowest dropped from 8 to 3.3. The highest class was lowered from 300 to 250 in 2003-04 with reduction in freight varying from 3.6 per cent for cement to 10.7 per cent for petrol. A further reduction of higher class to 240 in 2005-06 and 220 for 2006-07 is aimed at capturing the high rated commodities whose growth has not matched that of bulk commodities.
The tariff structure had become extremely complex and cumbersome. This Budget has addressed this issue by reducing the number of commodity groups from 4,000 to 80. Also, the number of classes has further been compressed to 28. As is to be expected, any such regrouping and reduction will impact on the rate of certain commodities. How it will affect the Railway's share depends on the present rail coefficient as well as the industry's ability to absorb the freight increase. The Railways traditionally had a "station-to-station rate" mechanism wherein specific concessions were granted to attract traffic. This was modified with the introduction of a more general `volume discount scheme' a few years ago.
Last year, attempts were made in the form of non-peak season discount scheme and empty flow direction freight discount scheme on specified routes. This has been formalised in the current Budget by offering a rebate of 15 per cent for incremental fright revenues of over Rs 5 crore and 10 per cent for less that Rs 5 crore and empty flow rebate of 30 per cent and for the first time dynamic pricing policy has been introduced.
The loyalty discount scheme for iron and steel and cement, and the long-term freight discount scheme are other attractive features for the industry. With the construction industry's phenomenal growth, the Railway's share of the cement traffic should have jumped substantially. But the growth, at 9.4 per cent, is less than the overall average.
The rail coefficient of this commodity is hardly 35 per cent. The industry should make full use of savings, which is estimated to be as high as 30 per cent, and pass on the benefit to the customer as the freight element is put at 15 per cent of the final selling price of cement.
The freight reforms announced are on the whole aimed at sustaining the growth in this segment, which accounts for two-thirds of Railway revenues. With better maintenance practices, which have an impact on the labour component, and lower cost of materials, with more sources now, the Railways has been able to contain the unit cost of operation.
The cost of the fuel component has been hovering around 18 per cent despite diesel price hike and higher traffic output. The stores component has come down from 6.53 per cent in 2000-01 to 5.54 per cent in 2005-06.
The Budget highlights that the unit cost of freight is lower than what it was in 2001, not only in constant but also in current price terms. It is obvious that intensive utilisation of assets and enhanced reliability, along with the economy measures adopted, have had a substantial bearing on the system's financial health.
The Budget projects an incremental loading of 60 million tonnes. The last three years have witnessed a spurt in freight with 38 million tonnes (MT), 45 MT and 60 MT of incremental loading. The passenger growth anticipated is also quite optimistic. These are based on past trends and are attainable.
An important accounting change, so as to conform to commercial accounting practices announced in the Budget for 2005-06, has been implemented for the current year with the approval of CAG. The lease charges for financial leasing of rolling stock, which were hitherto charged to operating expenditure without segregating the interest and principal repayment components, have now been bifurcated. This has resulted in a substantial 3 per cent reduction in the operating ratio with the decrease in ordinary working expenses by Rs 1,616 crore.
Yet another relief for Railways finances is the lower dividend rate payable to General Revenue on the capital-at-charge, as recommended by the Railway Convention Committee.
The reduction by 50 basis points has improved the internal resource generation by Rs 432 crore this year.
Thus, the Railway Budget is essentially freight-oriented without any major aberrations in the passenger sector which will have the effect of nullifying the initiatives.
As the economy is expected to sustain its growth levels, the Railways, as a basic infrastructure provider, should acquit itself creditably. The signals sent by the Budget are positive and conform to the expectations.
(The author is a former Financial Commissioner of the Indian Railways.)
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