Turnaround of Indian Railways
Turnaround of Indian Railways
Turnaround of Indian Railways
RAILWAYS
ABSTRACT
Indian Railways (IR) has been the prime mover of the nation and has
the distinction of being the largest railway system in Asia and the second
largest railway system in the World under single management. IR operates
more than 11,000 trains per day of which 7000 are passenger trains. The
railways have played a critical role in catalyzing the pace of economic
development and continue to be an integral part of the growth engine of the
country.
The Railways now looks all set to achieve the declared target of INR
20,000 Crores surplus revenue in the current financial year (2006-2007).
Modernization, safety and security of passengers, replacement and renewal
of assets, track renewal, improvement in passenger amenities, reduced
expenditure, increase in productivity and reduction in operating ratio,
computerization of railway systems, induction of new technologies for
signaling and telecom and prevention of leakages of revenue have been the
salient features of the overall development of Indian Railways.
Indian Railways' total cost is dominated by staff cost (44%),
depreciation and lease charges (14%) and fuel (14%) as can be seen from
the break-up below: Both staff cost and fuel expenses are external to the
system and have been increasing. In absence of productivity increases, the
unit costs have also increased in tandem.
The Railways is also working with the Ministry of Tourism and the
State Tourism Departments to jointly market major tourist destinations in
the country through appropriate travel packages. Sporting the Tourism
Ministry's "Incredible India" logo, many trains on the Indian Railways
network would soon narrate the cultural story of the regions they travel
through.
(Yadav, 2004:2. Emphasis added) Following from this strategic direction, the
Railway administration initiated several actions that could be grouped under
the turnaround strategies described above. Appendix I shows in a summary
form actions taken by the IR against each of the strategies and the outcome
achieved in terms of cost reduction/revenue raising etc. Appendix I, shows
that the financial turnaround of the IR (represented by E) is a function of
factors retrenchment (A),D. Gupta & M. Sathye Financial Turnaround of the
Indian Railways ASARC WP 2007/13 8 repositioning (B), Reorganisation (C)
and environmental conditions (D). According to Mr. Yadav it was factors A, B
and C, that is, ‘good management’ which led to the IR turnaround.
We demonstrate in this paper that it was factor D which contributed
substantially to the turnaround of the IR, though factors A, B and C also
played some part. A description of the actions taken by the IR in respect of
each of these strategies follows:
STRATEGY 1
RETRENCHMENT
The IR reviewed its catering and parcel service business and decided
to lease it out. The Railway Minister stated ‘…by leasing out catering and
parcel services we have reduced our catering and parcel losses of more than
a thousand crores’ (Yadav, 2007:13). Similarly, the IR attracted private
investments under thewagon investment schemes and siding liberalisation
scheme. This freed up resources for utilisation in more remunerative
activities.
Efficiency improvements
Downsizing
Outsourcing
Besides the catering and parcel service activity, the IR also outsourced
advertising activity. ‘In the other business areas of parcel, catering and
advertising, the strategy of outsourcing through public private partnership
and wholesaling rather than retailing was adopted’ (Raghuram, 2007:10).
The evidence presented above in respect of sub-strategies such as the
review of businesses that are not value adding, efficiency improvements,
downsizing and outsourcing appears to provide support to proposition 1 that
retrenchment strategy helped the IR to contain costs which ultimately
helped its turnaround. There is no evidence, however, to suggest that
substrategies like sale of assets, withdrawing from markets where the firm is
performing poorly, and reducing scale of operations were used by the IR
under the overall retrenchment strategy.
STRATEGY 2
REPOSITIONING
Focus on growth
Passenger revenue receipts that were Rs. 105 billion (2001) rose to
Rs. 172 billion (2007) – a rise of 64 percent in nominal terms. In real terms
the increase was more modest from Rs 82 billion to Rs 102 billion at 1996
prices. But this still represented an increase of Rs 20 billion— arise of about
25 percent.
Product innovation
Product differentiation
RE-ORGANISATION
Decentralising
STRATEGY 4
ENVIRONMENTAL FACTORS
The rise in freight revenue - the main plank of the IR turnaround - was
facilitated by the increased domestic demand for coal (for electricity
generation), for cement (for construction) and pig iron (for steel plants) due
to economic growth. There was also an increase in the iron ore for exports
(mainly to the Chinese market). In 2006, China bought more than 74 million
tonnes, accounting for about 84 percent of India’s total iron ore exports
(Sanyal, 2007: 1). The IR used the favourable international demand
reflected in substantial increase in iron ore price by raising the freight on
iron ore. As stated earlier freight on iron ore was raised by 17 percent.
As against this, the prime lending rate of State Bank of India was
10.25 percent in 2004. The softening of the international interest rate
environment helped IRFC to raise larger amount of debt at lower cost. The
global interest rate and credit availability has tightened in the after math of
the US subprime crisis which may raise the financing cost of the IR.