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Executive Summary

The role played by the Indian Railways in our countrys socio-political development is

indisputable. Apart from its stated duty of transporting goods across the length and breadth of

the country, it has played a stellar role in times of natural and man-made disasters. The role

of the railways becomes even more crucial to the development of the country as we enter the

21st century and the pace of the growth of the economy accelerates. The need for a efficient

transportation sector would become more crucial with every passing year. Thus it is

necessary for the Railways to remain competitive, in terms of both cost and quality of

services, to ensure an efficiently functioning transport

sector in the country.

As is obvious railways form part of the basic infrastructure of the country. Broadly all

infrastructure services can be divided into the following two categories

Open Access Services: These services are those from which people cannot be easily

excluded, irrespective of whether they have contributed monetarily to the

establishment and maintenance of the service or not. Some examples of this service

include public lighting, intra city roads etc.

Limited Access Services: These services are those which can be provided exclusively

on an user pays basis and those who do not pay can be excluded from enjoying the

benefits of this service. These services thus can be self-financing.

Railways ideally would fall in the latter category, as it would not be too onerous a task to

prevent somebody who has not paid for the service from enjoying its benefits. However, in

India the railways have come to symbolize an institution which exists to serve a socialpurpose as well as a commercial one and often this has led to policy distortions away from

the most economically sound ones. One major byproduct of this perception of the railways

has been the system of cross-subsidization of prices which is the category with the thinnest

margins, by freight services who provide the heftiest margins. This has led to a severe

financial crunch in the Indian Railways and as result the railways has failed to pay a dividend

to the government for the first time in 17 years. Further its ability to invest in facilities

required for modernizing the railways has also suffered a body blow.

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With the liberalization policies of the Narasimha Rao government the railways faced newer

challenges from without. As the country integrated with the global economy all prices in the

economy had to align themselves to those prevailing in the international markets. Thus as

prices of transport services fell internationally the natural protection that

the domestic sector, including the railways, enjoyed became a thing of the past. At the same

time it faced increasing levels of competition from other sources of transport from within the

economy

a) Post deregulation of the trucking industry the roadways have captured a huge chunkof the railways market share. This has been achieved with increased customer

orientation, flexibility and lower costs for short distance routes.

b) The development of expressways and six lane highways have only led to the level ofcompetition being offered by the road sector increasing. With the announcement of

the Golden Quadrilateral project the competition to the railways can on ly increase.

c) Petroleum products, once a stronghold of the railways, has been increasingly movingtowards exploring pipelines as the preferred mode of transport.

d) Coastal Shipping and Inland Waterways have also taken away market share from therailways, with the Government providing active support in terms of favorable policy

decisions. Products like cement and coal have increasingly started using these as the

preferred mode of transportation.

One of the obvious reasons of the decline of the market share of the railways is the ratio of its

freight fares to its passenger fares, which is one of the highest in the world. Apart from the

cost angle, the poor quality of the services that the railways provide have also led to its losing

market share to its competitors. Transport models over the last few decades have been driven

by cost reduction and increased speed of freight movement.

This has led to the development of a multi modal system of transport involving

containerization of freight and interactive coordination between railways, ports and

roadways. Thus, the neglect of containerization of freight has also led to the railways falling

out of many customers consideration set.