IR has to Smartly Balance the Social and Financial Objectives during Structural Changes

In what seems like the coming of a full circle, the recently presented Bibek Debroy report on the revival of Indian Railways has already started receiving the obvious ante against its suggestions. For economists and historians, Indian Railways presents a myriad example of awe and learning. It’s a classic example of the economic confluence of socialism with a potent hint of capitalism and how the two distinct components, melded with political influence, could create a stoic behemoth.

On the eve of independence, an enterprise which steered its initial journey as an amalgamation of several private enterprises under the British, suddenly found itself as a national monopoly with a socialistic flavour. The socialist fervour, along with the potential weightage of a ministry, induced a senile and obnoxious baggage upon it — much of which held a decremental financial value on its operations.

As a media commentator pointed out, the Indian railways of today is a country within a country. It undertakes every imaginable enterprise, from hospitals and schools to food joints and manufacturing units, but is worst at doing what it should do best. Sensing such complexity, when the NDA regime constituted an expert panel under economist Debroy, it was expected that in some sense the air might get clearer for solving this eternal puzzle.

But alas, the report has had implementation pangs from its very first day. The challenge is not in manifesting the complexity of the railways set-up, but in what needs to be done so that Indian Railways is brought back on track.

As is common in India, the presumptuous premise of private investment as a panacea to all ills, may not hold water in the case of Indian Railways.

Sure, private enterprises are run better than Government ones, but let’s not forget that a private investor will only come if there’s a venue for profit, stability of operations and a stable revenue flow. Socialist objectives in this case may throw a spanner in the works. The airport metro fiasco in Delhi, which initially was to be run by the Reliance Group but has now been taken over by Delhi Metro, is an example of how conflicting objectives can create problems.

The key to transforming Indian Railways, the veritable lifeline of the nation and its single largest employer lies in smartly balancing the behemoth’s social as well as financial objectives. Structural changes are imminent for a system like Indian Railways as a panacea to all ills, but has to have careful and step by step approach in policy creation and implementation

A replication of the Western model (where such enterprises were usually always private) might not work for India because of public perception, demands of the consumers and the political class. In fact, Indian Railways did try the public-private partnership model but the results were disappointing because of operational and conceptual challenges.

The solution to reviving Indian Railways lies in a creative mix of recommendations that will also require  policymakers to go an extra mile. The Debroy report differentiates between core and non-core activities but falls short of suggesting an implementation model.

Let’s take the example of a real estate investment trust, as a non-core activity under real estate management, as mentioned in the Debroy report. Raising money from real estate for a metro project may not be a daunting task (even if we ignore the demand and supply side aspects or potential competitions) but then the maximum real estate of Indian Railways is not located in the metros but in remote areas of the country. The trick, thus, is to find the commercial viability of these remote real estate parcels so that they start contributing to the bottom line.

Similarly, on the core activities side, the biggest challenge that Indian Railways faces is from its massive manpower. The Sixth Pay Commission has pushed it to the brink, and recommendations from the seventh one will not help either.

Learning from its past failures, Indian Railways must convert non-core activities into special purpose vehicles (paving the way for breakage of that umbilical chord) or consider complete disinvestment in such enterprises.

Of course, this needs to be done in a systematic and time-bound manner, as some non-core activities are closely identified with the social objectives of Indian Railways while others are purely commercial.

Staggering the issues of productivity enhancement and financial improvisation on core activities is a key requirement but, given its socialist and political baggage, this will be a big challenge for Indian Railways. A natural yet gradual reduction in manpower could be helpful. Indian Railways could adopt an expeditious version of the voluntary retirement scheme to reduce manpower before it gets hit by the Seventh Pay Commission.

There is much potential in Indian Railways’ remote real estate, which if used creatively in enterprises like distributed energy generation (solar/ wind), communication systems, commercial spaces and accelerator for village entrepreneurs, will not only bring additional revenue but also increase its social capital.

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