Indian Railways need Path-breaking Reforms: Rakesh Mohan, former RBI Dy.Gov

RakeshMohanModernisation is the need of the hour, there is no doubt about that but the question is how the government should go about it – is FDI good idea?

From FDI to Bullet-Trains, the Modi government has promised to change the face of Indian railways. Modernisation is the need of the hour, there is no doubt about that but the question is how the government should go about it – is foreign direct investment (FDI) good idea?

Also are investors interested to put their money into railways which has been making losses for many years?

Giving more clarity on these, Rakesh Mohan, former RBI Deputy Governor and Chairman of the Transport Policy Development Commission says, the Indian Railways are in need of path-breaking programmes and need to take drastic steps for capacity expansion.

According to him there is a requirement for restructuring and huge reforms in the accounting systems. A better accounting system will attract non-government investments, says Mohan.

He hopes that the NDA government gives more attention to railways.

Below is the transcript of Rakesh Mohan’s interview with Shereen Bhan.

Q: You had put out a report which was an integrated transport policy for the government. Nothing got taken forward. Let me ask you about your thoughts on the Modi governments current plans to try and revive and modernise the Indian railways, do you believe that FDI is the route forward? Do you believe that there will be takers as far as foreign investors are concerned for the Indian railways should the government decide to go down that route?

A: I am speaking as a former chairman of the National Transport Development Policy Committee and this has nothing to do with the International Monetary Fund (IMF). You mentioned that nothing has been done, the National Transport Development Policy Committee report, the India transport report was just submitted on March 1 2014. It has a long term perspective for a period of 20 years from now till the early 2030s. So, it is not something that something immediate needs to be done but I do hope that the government will indeed look at the recommendations in this very complex report that we have submitted.

Coming back to the railways, what is important to understand is that the railways has been losing traffic share for more than 60 years. In 1950 or thereabouts the railways had a freight share of around 90 percent in traffic and that has come down to about 30-33 percent or thereabouts. In the case of passenger traffic it had a share of about 70 percent in the early 50s and that has come down to just around about 10 percent.

The projections that we have done over the next 20 years suggest that assuming the country comes back to respectable growth rates above 7 percent per year over the next 5-20 years then the projection is that the passenger traffic will increase by a factor of 15 over the next 20 years and freight traffic by a factor of 7 over the next 20 years.

So, the key point really is that if we want to come back to kind of overall growth path that we had from around 2004 to 2012 then we do need to make a major investment in the railways in the next 5-20 years and it is essential if the country is to achieve the kind of growth that we are talking about.

Q: Do you believe that foreign investors will actually put money into the Indian Railways if the Foreign direct investment (FDI) route were to be opened up unless the railways undertake a structural reform which is what your report had suggested separating policy regulatory and management functions corporatising the entity that actually runs the railways without the crucial structural reforms and the functional reforms do you really believe that we can modernise the railways or attract any kind of private investment?

A: As I said I wanted to abstract from a specific focus on FDI because as you said there are much more important things to do to bring the railways back into the kind of financial situation which will induce investment either for public investment or private investment. Back in the year 2000, we started major road programs, there was National Highways Development Project (NHDP) on the one hand and the Pradhan Mantri Gram Sadak Yojana on the other and that has really transformed the phase of the country over the last 10-15 years.

What we need to do right now is to announce a similar path breaking program for railways’ capacity expansion over the next 20 years starting right now and just like we had this programmatic approach to the NHDP the national highway program as well as the rural roads program that we need to announce a major transformation of the railways now so that we indeed set the conditions under which different kinds of investments can come into the railways.

To give some numbers what is very interesting in the case of roads is that if you look back in the 1990s the annual investment roughly speaking in roads and railways were about similar overall; little under 0.5 percent of Gross Domestic Product (GDP) and around 4.5 percent of GDP.  What is interesting is that the total roads investment has indeed gone up from around 0.4 percent of GDP in the 1990s to around one percent now and this is very important because what we are recommending is that basically the road program is well underway, there are some problems of implementation but basically the overall structure of investment is clear and therefore thus continuing.

Therefore when we recommend that the investment to the railways which has remained at around 0.4 percent of GDP needs to go up to similar number like one percent of GDP over the next 10 years or thereabouts. It is not an unrealistic projection and that is the important point that if you could do it in roads over a similar period of time we can do it with railways if we put our minds to it.

Therefore as you were saying that this kind of expansion which we are talking about is a huge expansion taking railways investment to something at Rs 90,000 crore a year over the next five years or so from around say Rs 30,000 crore during the 11th plan, you can’t do this unless you do a major restructuring of the railways as you were talking about which does mean corporatising the railways as a whole, separating the policy functions from implementation functions and also a huge reform in the accounting system of the railways.

You can’t really expect private investment in the railways of foreign investment for that matter unless you recast the railways accounts into business accounting framework so that investors can actually see what kind of a financial performance they are getting in the railways in a transparent business accounting framework.

These were the recommendations that were similar to the railways reform committee that I had headed in 2000/2001. We also recommended and in fact the railways had accepted the reforms in terms of moving to business accounting framework but that has so far not been done. So that is absolutely essential if we want to get a non government investment in the railways in the years to come.

Q: You were talking about some of the reforms and some of those recommendations go back as you just pointed out almost a decade or more than that. There is your committees report, there have been several other committee reports that have recommended similar suggestions to modernise the railways. Do you believe that the Modi administration will perhaps take some of these measures forward this time in the railway Budget? Whether it is the setting up of the railway tariff authority which the previous government was also talking about, whether it is splitting up the functions of the railways. Do you believe that we are going to see finally some steps being taken by this government to move the reform agenda for the railways? Are you feeling confident and hopeful?

A: I can only hope that they will make moves in this direction because almost every committee that has been appointed has given similar recommendations if not exactly the same. So, it does seem to me that there is much greater consensus on the kind of things that need to be done.

One point I would make on the corporatisation issue is that already we have been doing different kinds of corporatisation. For example the dedicated freight corridor programme is being done after setting up Dedicated Freight Corridor Corporation (DFCC). So, the general principle of appointing or setting up a corporate entity is to do public investment of this kind is something that is accepted. We do need to move a step forward which is to corporatize railways as a whole which could be done by setting up a holding company at the top because you already have a DFCCIL, you have IRFC the Indian Railways Finance Corporation and a number of other companies in the railways fold which can all be subsidiaries of a holding company.

Similarly the railways also has a number of manufacturing enterprises under its control which are also not separated out as corporations. We have so many other public sector manufacturing companies, so there is no reason at all why in the first instance the manufacturing companies can’t be corporatized. So, I do believe as you are saying that given that the new government has come with the kind of mandate that it has, it has emphasized the kind of attention it wants to give in infrastructure. Therefore I do hope that an absolutely crucial part of Indian infrastructure that is railways which has not got the kind of attention that it should have in the last 10-20 years that it does get it now.

As I said in the beginning if we don’t do this we cannot hope to get the kind of growth that we hope we will get back to.

One of the major exercises that we did in the transport committee was to look at the transportation of what we called energy commodities and also other bulk commodities. If you look at the kind of growth over the next 5-20 years the transportation of coal to produce power is going to be a major issue. The transport systems at present, the railways are already clogged in terms of their capacity to transport coal. If you grow at the rate of 7 percent plus the next 20 years, hopefully 8 may be 9 percent over the next 20 years if we do everything right then you will need to transport 2.5-3 times the volume of coal today.

We have made very detailed recommendations on the railways investment to do with this transportation of coal in addition to the transportation of iron and steel. However if you don’t do these things we can’t get the power generation increase that we need and hence we cannot then get the overall economic growth.