Why privatising India’s rail network is a bad idea

It is no secret that the Indian Railways is in dire need of funds. If the country’s rail network is to be truly strengthened and its capacity augmented by increasing the speed of trains and opening dedicated freight corridors, huge investments are needed.

Who will do the investments? The infrastructure that we see in developed countries was all built by their governments. No private player had either the will or the capacity to do it. Investment in railways is also rewarding. As per an economic survey conducted by economist Arvind Subramanian, if you invest Rs 1 in the railways, it generates Rs 5 in the economy. The Chinese government invests 11 times more in its infrastructure than India, and today, three Chinese public sector companies are among the top five in the Fortune 500 rankings.

As per the report by the Comptroller and Auditor General of India, or CAG, the operating ratio of the railways was 101 percent for the fiscal year 2019-20. This means that if its income was 100 and expenditure was 101, the government reported the operating ratio to be 98.36 percent. Furthermore, the railways has to set aside money for its pension fund from its own revenues. The required appropriation to the pension fund in 2019-20 is Rs 48,350, and if we add this figure then the operating ratio will worsen to 114.19 percent. Similarly, in 2020-21, the required appropriation to the pension fund is Rs 51,000 crore in revised estimates, adding which would take the operating ratio to 131.49 percent.

To cope up with the increased demands of an industrial economy, we need dedicated freight corridors and express lines, but the railway can’t mobilise resources on its own. And the private sector is not forthcoming when it comes to investing in infrastructure. So, the only support that remains is capital expenditure from the government.

Public good or private good

To understand the privatisation efforts underway, it is important to understand the perspective of the incumbent government. In 2017, the rail budget was merged with the union budget with the idea that the railways would meet its revenue expenditure from its revenue earnings and the ministry of finance would provide the Gross Budgetary Support, or GBS, as usual for the Capex.

The standing committee on railways for 2019-20 noted that the annual plan for 2020-21 of the ministry of railways was pegged at Rs 1,61,042 crore, comprising GBS of Rs 70,250 crore, internal resources of Rs 7,500 crore, and Extra Budgetary Resources, or EBR, of Rs 83,292 crore. But, in the revised budget, the GBS was reduced by Rs 41,000 crore to just Rs 29,250 crore.

In the budget speech this year, the finance minister laid down ambitious plans for the railways. There is a proposal of a National Rail Plan, or NRP, for India. It is a 30-year plan from 2021 to 2051, which envisages investments of Rs 38.5 lakh crore. The plan is to create a “future ready” railway system by 2031.

The Narendra Modi government has never been serious about funding public institutions. Since coming to power in 2014, they have been opening up channels to put up the public sector for sale. Amending the Foreign Direct Investment, or FDI, policy in August 2014, the government included the construction, operation and maintenance of 10 areas of railways, including electrification, signalling system, and freight terminals, and brought them under 100 percent FDI through automatic route which means the buyer or investor doesn’t require prior approval from the Reserve Bank of India or the government.

According to the NRP, all freight trains will be privatised by 2031, along with 30 percent of the 750 railway stations. All profit-making AC coaches will also be privatised. Only loss-making second class passenger trains will be left with the railways. Interestingly, the private player just has to invest in running the trains. The driver and guards will be from the railways as will be the tracks. The railways will also maintain the stations, while the bookings will be done by the Indian Railway Catering and Tourism Corporation, or IRCTC, a subsidiary of the Indian Railways.

This means the Indian Railways will run only loss-making passenger trains while all profit-making trains will be operated by the private sector. As the profit is only from AC trains, won’t the railway losses increase by this?

What will the railway earn from privatisation in the first place? It will collect only haulage charges, including fees for using station premises, railway engines, tracks, signals, and overhead electricity as well as driver salaries. The private parties will be free to quote any prices and could resort to dynamic pricing, as happens in the air travel business. If you ask at least what percentage of profit comes back to the public with all the private investment, the answer is that there is no data.

It is important to highlight the case of Reliance Infrastructure, which abandoned the Delhi Airport Link Metro in July 2012 after just over a year of operation because it didn’t earn the expected profit. The Delhi Metro Rail Corporation, or DMRC, had an agreement with Reliance for the development and maintenance of the airport line on a 50-50 investment sharing basis. The total cost of the project was Rs 5,800 crore, and the DMRC contributed Rs 2,915 crore. The rest was to be borne by Reliance but, through major cost cuttings, they withheld the complete investment. After completion, the metro project was found to have a weak structure with leakages and defects. On top of that, Reliance fixed Rs 150 as fare, expecting that 44,000 passengers would use their services a day. But that didn’t happen and there was no profit. Reliance closed the operations midway and the DMRC had to take over. After repairs they reopened the line with a fare of Rs 50, and the passengers returned.

It has been proven time and again that the private sector doesn’t come forward to invest in infrastructure because it has a long gestation period, and they must wait for profit to arrive. The Indian Railways is driven by a social obligation to provide basic transport facilities to people, and lays the foundation for several small and medium scale economic activities. So privatising the railways means privatising profit and burdening the public sector with losses.

This is the first part of a two-part series on the government’s privatisation plan for the Indian Railways.

This article is published under the Smitu Kothari Fellowship of the Centre for Financial Accountability, Delhi.