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 social purpose 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.

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 chunk of 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 of competition being offered by the road sector increasing. With the announcement of the Golden Quadrilateral project the competition to the railways can only increase. c) Petroleum products, once a stronghold of the railways, has been increasingly moving towards exploring pipelines as the preferred mode of transport. d) Coastal Shipping and Inland Waterways have also taken away market share from the railways, 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.