High tariffs to cover high costs hurt Railways’ competitive position in the market

Best freight reading in a year provides no cheer for Indian Railways. While Indian Railways’ freight growth on originating tonnes basis is impressive, the internals are anything but that

New Delhi: Indian Railways’ freight volumes grew 5.5% in November, helping it register growth in its freight business revenues for the first time in a year. More than three-fifths of the national carrier’s revenues come from the freight business. So expansion in this business should aid railway finances.

Freight traffic grew after four consecutive months of drop. But the growth provides no cheer. There are two reasons for the lack of cheering. One, it is aided by a favourable base. In November 2015, a year ago, freight traffic was down 4.2%. The second cause for disquiet lies in the quality of freight data. While the freight growth on originating tonnes basis is impressive, the internals are anything but that.

The net tonne-kilometres (NTKM), which captures the conveyance of a unit of goods over a distance (captured in million kilometres), continues to fall. It dropped 1.2% in November. So far this fiscal year, it is down 6%. Similarly, the average lead, or the average distance a tonne of goods is transported, fell 6% in November and 6.8% so far this fiscal year. See chart 2.

The two readings show that railways are carrying goods over a lesser distance, Sachin Bhanushali, chief executive officer, GatewayRail Freight Ltd points out. Logically, falling NTKM and average leads should drive freight revenues lower. But high tariffs and differential pricing helped railways register revenue growth.

The strategy may help railways avoid sharp deceleration in revenues, but it undermines the national carrier’s competitive position in the freight market. High tariffs are driving traffic to other modes of transport.

The rising export-import (EXIM) imbalance is also hurting. According to Jefferies India Pvt. Ltd, lack of commensurate exports (containers are going inland with goods and returning empty) are forcing logistics operators to de-stuff cargo at ports and transport it by roads. “For an empty container, Indian railways charge between 57-75% of the full container charge depending on weight. Rising imbalance hurts the liner partly as all internal logistics charges of a full container while going and an empty container while returning cannot be entirely passed on to the importing client,” Jefferies says.

Of course, one cannot blame weak economic trends—exports and subdued domestic demand—on Indian railways.

But as Bhanushali points out, when the macroeconomic trends are weak, railways should cut costs and take a softer approach on tariffs. Instead the national carrier is keeping tariffs high to cover high costs hurting its competitive position in the market. “Indian railways should take a commercially prudent approach of softer price regime to regain the lost market share in both containerised and non-containerised segments of freight business,” Bhanushali adds.