Yet even though the railways are the cheapest and least polluting way to transport, their share of the combined passenger and freight movement (traffic on rail and road) in India fell from 78% in F1951 to 18% in F2012.
The Decline of the Railways – Understanding the Reasons
We believe that there are three key reasons for the massive decline in the share of the railways in transporting Indian freight and to some extent passengers:
1) Underinvestment: Budget allocation in rail, at just 20% of roads, is significantly lower than global standards.
2) Poor utilization of funds: With 60%+ of funds being allocated to projects with negative rate of return, the railways choked off internal funding too.
3) Cross-subsidization: Passenger fares have moved up just 28% over the last decade vs. a 91% increase in freight rates, with passenger losses being compensated by squeezing the freight customers. This has caused both freight to move over to road and choking of internal generation of funds.
Why Does It Matter?
So the railways are in a decline and inadequate, but why will a fix make them a driver in the next India?
1) Boost to industry from lower logistics costs: Based on a World Bank study, we estimate that the gains would be 1% of net sales for the entire corporate sector – or, if passed on, lead to a 5% increase in Trade + a 100% increase in the range of products exported.
2) A 5x+ rail multiplier in operation: The multiplier means that if the railways can successfully achieve the plan to spend Rs8.56 trillion over F15-19e, 20% of all incremental growth forecast by our economist, Chetan Ahya over F2015-19e would come only from the railway-led investment
The Plan for the Fix
The new Railways Minister, Dr Suresh Prabhu, has formulated a multi-pronged approach to resolve the issues created over the last few decades:
1) Improving customer experience: We think this is key to increasing passenger fares and reducing the losses.
2) Making rail a safer means of travel
3) Expanding capacity: 60% of railway lines and 88% of the high density network run at 80%+ capacity utilization
4) Making Indian Railways financially self-sustainable: The goal is to enable them to service debt and invest in renewal of assets.
Is Ambition Likely to Lead to Disappointment Again?
India has traditionally been the land of opportunity as far as infrastructure (including the railways) is concerned – high on promise and low on delivery. However, we expect this time to be different for the following reasons:
1) PPP renegotiation to lead to a more robust model: Railways are in a position to take advantage of the evolution (through challenges) of the PPP model in India.
2) Strong political mandate, infra focus already visible: An increased allocation to infrastructure (mainly roads), plus measures to reduce risk for the private sector and ease funding challenges, reflect strong intent.
3) Focusing on the right problem: The focus on speed rather than the historical solution of throwing more rolling stock on the burdened tracks is a game-changer.
4) Innovative funding options being explored: With $25bn of funding already raised from LIC (Life Insurance Corporation of India) and land monetization and bond issuance on the cards, the railways are seeking differential sources of funding. That reduces the challenge posed by India’s constrained banking sector.
5) Delivery has already started, though there’s a long way to go yet: We count 132 promises (across 11 broad areas) made by the Railways Minister in the F2015 speech. Our analysis of the Rail Ministry’s tracker indicates that delivery has already begun on 72 of those.
Attached: Full Report By :- M O R G A N S T A N L E Y R E S E A R C H
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