Can Compensating Loss-Making Routes Change Railways Fortunes?

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TOPIC: General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes

In news: PMO recently directed the Union Ministry of Finance to fund the losses incurred by the Ministry of railways for operating non-profitable trains on strategic line and backward area rail routes. The directive ends a tussle that began after the merger of railway and general budget when union finance ministry discontinued the practice of providing annual subsidy to the railways.

Background

Every year, the Indian Railways used to get subsidy from the Finance Ministry for losses incurred on railway operations on strategic lines. After the Budget merger, the Finance Ministry had discontinued the practice of providing annual subsidy to the Railways for operating loss-making strategic routes as the Railways was no longer required to pay an annual dividend.

Rationale

These lines mainly cater to defence movements on border areas and development of social and backward region, hence the Standing Committee on Railways recommended that reimbursement of operational losses on strategic lines and railway lines in hilly, coastal and backward areas should be continued. The compensation helped the Railways in providing relief towards “socially desirable projects” which are usually loss-making projects.

Will it benefit railways?

When a state electricity board subsidizes consumption of power by farmers, the government is supposed to give that money as a subvention from budget. So in principle, railways should be treated similarly. However, this is not the only area where the railways are subsidizing people which has nothing to do with the commercial viability of railways. The passenger trains are heavily subsidized along with many other quota benefits like ladies, senior citizens, sports, defence etc. Also, the suburban passenger fares in Mumbai are subsidized whose burden is borne by railways. Such kind of subsidies do not encourage profitability or at most viability of running passenger trains.

Present railway policy

Today, in the system of railways, whatever new line is to be made, it is known that it will be set at losses. The general budget would pay for the capital cost. For the strategic lines, the defence ministry would pay for the capital cost. So the capital costs subsidy was always there. But the reimbursement of operating losses was not there. All over the world, transport profits are driven by freight traffic and the passenger traffic, whether road or railways, India or Europe, are always subsidized.  Now unless there is a freight traffic, and there is need to run the passenger trains on low traffic lines, the railway will make losses.

However, unless the railways extend a line to particular area, that area will not develop. Hence the static analysis that traffic is low is not justifiable. Once the lines are established, there is scope for new communication and transportation channels. New industries and migration of people can happen. Thus, a dynamic approach is required while determining the viability of establishing new lines.

Way forward

There is a need of robust regulator otherwise rail policies will always remain an announcement. Railways will give some calculation about losses incurred on certain tracks and there will be a tendency to inflate it. It may also happen that the authority sanctioning subsidy may question railways’ efficiency and decline to provide for subsidies. Thus a subjective element will always persist while undertaking the accounting as well as other railways related decisions. Hence, an independent regulator will fill in the gap.

A holistic approach is needed and not a piece meal approach always undertaken. If the government makes some decisions, before implementing it, all the known and related issues should be sorted out. For example, once the government had decided that there would be no two budgets, the compensation topic should have been resolved before rather than waiting for it to be challenged and then sort it. Before the merger, there was a populist approach to announce uneconomic lines. But now, decisions should be made in interest of passengers, freight customers as well as railways. Railways is a monopoly unlike airways. So there is only scope of reform in it. There have been various committees that have made various recommendations. These recommendations can be implemented considering their long term merit and viability and short term required changes.

Post-independence, railways has become purely a central subject. Hence it doesn’t allow the states to identify their own needs and fix relative prices for the rail services provided. A serious lookin is required to consider shifting railways to concurrent list. Pre independence, this freedom was there with the state government and also power to fix the fares for whatever line they fixed. Cooperative federalism in railways should be encouraged with states having more independence to manage rail affairs.

Currently, the railways is not working at its full potential and lot of resources are being wasted. Unless the railways provide confidence to the passenger and freight customer that railways will provide transportation to their choice and will be charged accordingly, railways do not see a bright future. India is a highly mobile country. People travel daily for work and vacation. But putting too much emphasis on its social obligation, not enough finances remain for assuring infrastructure for passengers’ security or new capacity building. Proper commercial accounting methods and change in business rules if need be, should be done to let the railways survive as country’s lifeline.

Connecting the dots:

• ‘Railways have a social obligation to fulfill even it is non-viable’. Do you agree with the statement? Analyse
• How can Indian railways can become the keystone of India’s multimodal network? Explain in detail.