As the calendar rolled into 2020, Indian Railways implemented an increase in passenger fares, with the hikes varying depending on the class of service. Slow and non-A/C services saw an increase in fares of 1 paisa per kilometer, while the faster, air-conditioned services saw increases of 2-4 paise for each kilometer depending on the type of service. IR expects that the increases will provide about Rs.2300 crores in additional revenue eac year.

This year, the budget of IR is about Rs.272,000 crores. A big chunk of this money comes from the freight charges it levies on the goods it transports. The bulk of this is coal, and dwindling revenues from the transport of coal has led to a shortfall in revenues. Against the running targets that IR had set for this financial year, between April and October the revenues were about Rs.20,000 crores short. The hike in passenger fares is to close that gap, but only by a little.

The risk of popular and political backlash whenever fares are raised has left IR treading carefully and slowly. The last hike was five years ago. This time too, while there were reports earlier that fare hikes could be 5 paise per km or higher, in the end IR seems to have settled for a much lower uptick. And suburban train ticket prices in the metropolitan cities have also not been touched; although most passenger traffic is on these services, these are a thorny challenge for IR, since there is concentrated community of users whose likely response to hikes must be weighed before any change.

Running out of track

Historically, the two sources of financial support to keep IR chugging along have been the government and the coal industry. The Central government provides regular support for capital expenditure, leaving the railways to meet only their operational costs. This year the capital support is in the range of Rs.65,000 crores, and while in typical years the Centre's support has kept IR's operating costs within range of its revenues, this year that too is slipping.

For Indian Railways, how different will the future be from the past?

But the even bigger risk for IR is in how revenues from freight transport might change. These funds hugely subsidise the losses incurred passenger services, and have kept the railways afloat all these years. The challenges that loom on this front could have serious consequences for the railways, especially since the power distribution companies that eventually bear the cost of higher transport are also in financial distress. (see links to related articles in box).

The dramatic fall in the price of renewable power has put severe pressure on a lot of coal-fired power plants. And higher-than-anticipated prices of imported coal have added to the threat to the industry. While coal will continue to remain important for many years because it still forms the backbone of a lot of industry in the country, it's not clear how profitable it will be. That's likely to put a brake on new investments.

For IR, coal's difficulties are in turn its own, since so much of its viability depends on coal-dominated freight transport. Passenger fare revisions are much needed, but these have remained infrequent, as the Centre has chosen to tread carefully on hikes. A few years ago, a hike proposed by the then Minister, Dinesh Trivedi, was reversed promptly at the insistence of his political boss, the West Bengal Chief Minister Mamata Banerjee.

IR also faces a Catch-22 situation; its share of freight transport revenues has dwindled over time, from a high of nearly 5/6ths in the 1950s to a little over a quarter of the market today. The significant investments in highway infrastructure by the National Highways Authority of India and by several state governments have made road transport of freight more attractive. To compete with this, railways must modernise and expand to provide both speed and reach for its customers, but would require money, which is already in short supply. A large wage bill makes things even harder; the 7th Pay Commission's recommendations added Rs.22,000 crores to staff costs.

More to come?

The slowdown in economic growth is also bound to have an impact. The government has announced a massive infusion of capital into infrastructure projects in the coming five years, but its own room for investment is narrowed by the slower-than-usual growth in tax revenues. As its Budget comes under pressure, will the Centre continue to fund IR, or will it yield to voices clamouring for the government to get out of many operations of the railways?

Serious questions of money often prompt a return to the drawing board, and IR has seen its share of these too. Two questions in particular are never far way - whether IR should be privatised (at least in part) and whether it should be decentralised, leaving the states to run more of the operations and IR playing only the role of the integrator, setting standards for technology, operational performance and safety.

A constant thread running through policy debates is that the government should stick to things that truly have to do with governance, and not get into things outside of this. Even before its financial troubles, Indian Railways' name regularly popped up in such debates; the cash cruch has only made the demand louder.

There has been some intermittent movement in response to this; the most recent step was the decision to invite private players to operate train services on about 150 routes. But it is not clear if privatisation will help; more likely, the profitable parts of IR's operations will be privatised, potentially leaving an even bigger hole in its finances.

The Centre-controlled planning and budget-setting of IR has also put it at odds with the mobility needs of a rapidly urbanising country, and clustered economic development in some regions. Large metropolitan areas as well as corridors between them need to be developed with rail-based mobility as an important anchor, but with IR not integrated into the statutory planning processes of metros nor under the control of the states, this has not been possible. In Bengaluru, for example, despite a broad consensus in favour of a large suburban rail service, only small steps have been taken - the original proposal was made in the 1980s!

The fare hikes in the new year are thus only the tip of the iceberg; beneath the surface, Indian Railways must grapple with very serious questions that could end up being answered in ways that totally change the system as we now know it. Having steadfastly maintained a course even in the face of mounting evidence of the need for change, IR may finally be forced to take big strides in very different directions.