Thursday, 18 August 2016

GST & Indian Railways Sustainability

Doctorate in Public Systems from IIM Ahmedabad and currently teaches at TAPMI, Manipal 

With the passage of the Goods and Services Tax (GST) Bill in Parliament, there is a sense of well-being in the country, as it is expected that this tax would turn India into a single market, cut the flab in the logistics industry and remove distortions created by inter-state taxes, thereby make the manufacturing sector more competitive. Growth of the manufacturing sector would spur growth of the logistics industry. The transport sector would be happy with the double benefit of growth in its business and reduction in transportation costs.

But Indian Railways (IR) should be worried with the arrival of the GST, unless it wants to remain in a sthitpragya state.
Why so?

Because IR’s sustenance, freight traffic, — which accounts for about 70% of its revenue from transport operations — has been plateauing of late, registering about 1.095 billion tonnes in 2014-15 and 1.107 billion tonnes in 2015-16.
Indian Railways had commissioned the National Council of Applied Economic Research (NCAER) to assess the prospects of its freight traffic in 2016-17 as well as to suggest possible strategies.

NCAER recommended reduction of freight rates, removal of 10% port congestion charges, review of 15% season surcharge, some changes in operations such as reviewing the two point loading restriction, restoring the long- term committed business segment of short- distance freight traffic with concessions and abolishing dual freight rates for transporting iron ore (30% more for export than for domestic use). All these recommendations were made essentially on the principle of price elasticity — that with decreased freight charges, demand would increase substantially and hence, overall revenue would also increase. IR removed 10% port congestion charges and 15% season charges effective from May 1, 2016. It abolished dual freight rate for transporting iron ore effective from May 10. These measures did benefit IR — a three% overall increase in freight loading — but there was also a seven% overall drop in revenue in June 2016 compared to June last year. This apart, in April and May this year, there was a decrease in freight loading by two% from the figure during the same months in 2015. In a nutshell, IR did not generate as much revenue in the first quarter of 2016 as it did in the same quarter last year. Neither the existing freight charges nor the reduced freight charges helped IR increase its revenue from freight traffic — decreased freight charges did help it transport some more freight but with a loss of revenue. Why? Price elasticity works only when the service delivery is the same across competitors. IR’s service delivery has been worse than other transport modes. It became convenient for IR to go for the knee- jerk measure of reducing freight rates based on the NCAER report without even assessing by itself what was essentially wrong with its freight service model. NCAER, on its part, did not analyse the issue in a holistic manner to arrive at path- breaking solutions to increase rail freight traffic.

What was the core issue that stopped IR from increasing its freight transport output? It is this: IR has been unable to provide faster and timely transportation of non- bulk freight transport and hence has been unable to make a foray into non-bulk freight transportation. Whether it is the transportation of raw material, partly processed goods or finished goods, those who look for faster and committed delivery don’t prefer transporters who transport goods at their own will and are non- committal about delivery.

To understand this fully, we need to know the freight transport pattern in general. There are two categories of freight — bulk and non- bulk materials. Materials defined by weight and volume such as coal, iron ore, food grains, petroleum and cement are bulk materials.

There is a qualitative difference in the transportation and handling of bulk and non- bulk materials. Some of the bulk items such as iron ore and coal are of low value, whereas most of the non- bulk items are invariably of high value. Materials in transit also form the inventory.

Hence, the transportation of non-bulk materials happens in smaller consignments, rather than accumulating and transporting them in one go. End-to end transport also has to be faster, safer (for the material) and the material has to be delivered in the committed time, even if the transportation cost is higher. On the other hand, the sole criterion for transportation of low- value bulk material is that it should be cheap. Given this condition, IR had a clear edge over road transport in transporting low- value bulk materials of coal and iron ore. IR also has an edge in transportation of high- value bulk materials such as cement, fertilisers, food grains, petrol, oil and lubricants, especially if these are transported over long distances. As a result, bulk items contribute about 89% of freight loading and 85% of freight earnings of IR. However, IR pays a price for transporting bulk items, as 40% of the wagon movement is on empty rakes. This is a huge flab IR carries for capturing and retaining low- value bulk material transportation.

In bulk freight traffic, coal is the single major source of revenue for IR, contributing about 30%, against 29% of the entire passenger transport.

Hence this would hit IR’s financials. The NCAER study estimated that freight transport for IR would grow at 2.1% in 2016- 17 and half the growth would come from coal alone. However, IR may not be able to achieve any addition to coal transportation volume as conditions are not conducive.

As of 2016 India has surplus power and its power sector has been steering towards solar power. Against this backdrop, IR cannot depend any more on coal to augment its freight traffic and hence, its revenues. Moreover, pipeline and coastal shipping have also forayed into transportation of bulk items, giving IR tough competition. For medium distances, cement transportation has already moved towards trucks. In such a situation, it is difficult for IR to retain existing bulk freight transport volume, let alone augment it.

Rationalise passenger transport to gain freight traffic
The capacity released thus would help the Indian Railways move freight traffic at an average speed of 50 km per hour. This would enable it to make inroads into transportation of non-bulk items

To overcome the plateauing of freight traffic, the Indian Railways' (IR) Hobson's Choice is to increase transportation of non-bulk freight. The larger issue for IR is providing faster and more reliable end-to-end connectivity than road transport, rather than a comparison of its freight transport fares with that of road transport. In India, a truck travels about 280 km in a day; freight trains cover about 576 km (at an average speed of 24 km per hour) during the same period.

However, for non-bulk freight, less frequency, lack of facility to transport smaller consignments, cost and uncertainty associated with last-mile connectivity in rail freight transport mean that truck transport has remained competitive.

The issue becomes much larger for IR with GST. With the removal of state border checkpoints, a truck is expected to travel about 440 km in a day. Hence, to capture non-bulk traffic, IR needs to increase the average speed of its freight trains from 24 kmph to at least 50 kmph. There is no restriction on the part of IR's trains (either passenger or freight) to reach a maximum speed of about 90 kmph on any section of the network -almost all stretches support that speed. The issue is about priority in accessing track infrastructure and hence, the associated reduced average speed. Although about 70% of revenues from transport for IR comes from freight transport, it gets the least priority in the waterfall model of allowing access to tracks. Also, it uses only about 33% of the IR's network capacity. Luxury trains such as Shatabdi, Rajdhani, Duronto travelling at an average speed of 80 to 100 kmph, Express/Mail trains with an average speed of 50 to 60 kmph and ordinary (passenger) trains running at an average speed of 36 kmph get first, second and third preference, respectively. Freight trains come next in the order of preference.

Although a detailed study would yield a blueprint for how IR could achieve both higher passenger volume and freight transport for the given network, the directions in which it should move are outlined here. To achieve an average speed of 50 kmph, freight trains should get access to at least 50% of IR's network. Then the question is how the existing volume of passenger traffic can be maintained, if not increased, with just 50% access to network capacity against the current 67% access.

The share of passenger traffic in ordinary trains decreased from 37.5% in 2005-06 to 28.42% in 2014-15, whereas the share of faster trains increased from 62.5% in 2005-06 to 71.58% in 2014-15. Since 2013-14, passenger traffic in ordinary trains has been decreasing in absolute numbers also. Even some of the Mail/Express and luxury trains have been running without much demand for years together.

The Comptroller and Auditor General (CAG) of India has been highlighting this anomaly consistently in its earlier reports. For instance, in its report in 2009, the CAG highlighted that 30% of the newly introduced trains in nine zones between 2002-03 and 2007-08 had less than 50% occupancy; yet many of them are still running. The Bibek Debroy report submitted in 2015 mentioned that there are at least eight luxury trains, which have been running on losses. Their losses are because of poor occupancy, as evidenced from the hundreds of tickets available even on the day of journey of these trains.

Against this backdrop, IR should go for a major overhaul of the schedule of its passenger trains. Although there are regular official orders that instruct railway zones to identify trains with an occupancy rate of 50% and reduce their services or coaches, there is no concerted effort in that direction on the basis of train data analysis.

The first measure I would recommend in this direction is that IR operate passenger trains based only on demand; populist trains introduced in the last two decades without commensurate patronage should be trimmed by reducing their frequency, if not altogether stopping them. Even as several trains have more than 200 waitlisted passengers every day, running some trains with so many vacant seats is a criminal waste of the scarce resource of a railway network.

The second measure I would recommend is that IR estimate the total transport demand (rail, bus, car and air) in terms of O-D pairs between cities or clusters and then reschedule trains that provide faster connectivity between the cities or clusters with limited stop service at originating and terminating cities or clusters.
Although Railway Minister Suresh Prabhu has not yet yielded to the pressures of additional stops or unviable trains, more than enough damage has already been done. That damage has to be reversed.

The third measure I would recommend is that IR phase out at the earliest ordinary trains that have lost patronage and which cause congestion on a high-density network. IR locomotives take about 10 minutes to reach their maximum speed permitted on that section. The problem with ordinary trains is that with stoppages as frequent as every 15 km, they have been decelerating even before accelerating to reach the maximum speed. The basic theme of all these measures is that trains (both passenger and freight) are supposed to continuously run all the time, except for pick-up and drop at points determined by the O-D data.

If the flab in scheduling of passenger trains is removed, according to the measures suggested here, IR could achieve the same passenger traffic - or even more - by utilising just 50% of its network. The average speed of passenger trains would shoot up by at least 25 kmph, thereby leaving 50% of the network for freight traffic. With the capacity released by this rationalising measure, freight traffic would be able to move at an average speed of 50 kmph, thus making major inroads into the transportation of non-bulk items. Without a rationalisation in passenger transport, IR may lose high-value bulk and non-bulk freight traffic to road transport completely. It would then have to live like a parasite on the subsidy provided by the Budget.

Article Collated by Surya Narayan Nayak

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