Lalu Yadav is no "liberaliser"

The Indian Railways (IR), declared to be on the verge of bankruptcy, only a few years ago has produced a suprlus of Rs 200 bn this year. The turnaround in the railways is one of the more striking aspects of the India growth story and Railway minister Lalu Prasad Yadav is the toast of the country.

Yesterday on news channel NDTV, anchor Prannoy Roy asked Tarun Das, Chief Mentor of the Confederation of Indian Industry, whether he thought Lalu was a "future liberaliser" To which Das replied, "He's not a future liberaliser, he is a current liberaliser". Grins all round.

I guess it all depends on what you mean by "liberaliser". If you mean anybody who produces results, I have nothing to say. But if you mean, somebody who has pursued the liberalisation or reformist agenda, I couldn't disagree more.

The reformist agenda for IR was set by an expert committee headed by Rakesh Mohan, currently Deputy Governor of India's central bank and then Executive Vice Chairman of Infrastructure Development Finance Company Ltd. It is interesting to go through that report now (submitted in July 2001) and compare what IR have done under Lalu's leadership with what the "liberalisers" had suggested.

The Rakesh Mohan committee starts off by observing, "Today IR is on the verge of a financial crisis... the rate of growth in revenues has been outstripped by the rate of increase in costs...Clearly, continuing the current system of Railway operations into the future is not a feasible option".

The committee noted the reasons for the alarming state of IR finances: high investments made in unremunerative projects out of political complusion; incorrect pricing, notably heavy subsidies for passengers, and uncompetitive prices for freight (which resulted in IR losing market share to road transport); rising employee costs and poor productivity; inadequate investments both for expansion and modernisation and for maintenance. Given low volumes and wrong prices, IR could not generate surplus for growth; and the government's own finances were strained which meant that budgetary support for IR could not increase. IR was caught in a vicious spiral of rising costs, low revenues, low surplus and low investment.

The committee then went on to argue that IR needed to be reinvented:".. to modernise the railway system in India will require more than running it better. It will demand that it is run differently".

What would reinvention mean? Some of the key recommendations were as follows:

• Separate the policy, regulatory and management functions in the Railways. Policy would be set by a corporate entity, Indian Railway Corporation (IRC), under the guidance of the government. The corporation's activities would be regulated by the Indian Rail Regulatory Authority, an independent regulator that would keep a watchful eye particularly on tariffs and subsidies. The IRC would be governed by a reconstituted Indian Railways Executive Board (IREB) which would include executives drawn from the private sector.
• Focus on "core" transportation business and spin off "non-core" activities such as catering, hotels, research, schools, etc.
• Rebalance pricing, that is, increase passenger fares (which were heavily subsidised).

Without restructuring along the above lines, the committee warned, "the withering of IR is a clear and present danger".

We know better now. IR did not wither way. Barely five years later, in 2005-06, IR produced a surplus of Rs 130 bn.

How did this happen? First, like most observers of the economy, the committee did not anticipate the sharp rise in GDP that started in 2003-04.- it assumed that the economy would grow at 7%. Faster growth created the potential for larger volumes. But, how did IR cope with large increase in large volumes without making huge investments? Answer: better capacity utilisation.

• Wagon overload was permitted. There was always overloading of wagons but the excess revenue was being pocketed by corrupt IR officials. Legalising the overload meant that the revenues would accrue to IR. This was not some brain-wave of Lalu's- the IR top brass had researched the issue and concluded that, on select routes, such overload was consistent with safety. It's a tribute to IR's technical depth that this approach has worked.
• Better wagon turnaround: idle time at yards was minimised through careful monitoring of turnaround times.
• Using wagons with higher capacity.
• Adding more coaches to passenger trains- and increasing the length of rail stations as required. This enabled better utilisation of capacity on passenger routes as well.
  
• Less time lost due to accidents- in this IR benefited from the Rs 170 bn investment in state of the art safety devices made by Yadav's predecessor, Nitish Kumar.
  

Now that volumes have expanded and the surplus has burgeoned, IR can confidently make investments in new capacity- its showpiece will be the dedicated freight corridor for which the cost is conservatively estimated at Rs 300 bn. But this will take six to seven years to fructify. Better capacity utilisation is exhausted can help the IR meet demand for two or three years. Thereafter, IR will be stretched to accommodate growing volumes.

We are seeing this reflected in the numbers: the revenue growth projected for 2007-08, 12.8%, is lower than the 16% growth achieved this year and the 15% growth of 2005-06. But, the turnaround is there: IR is no longer in the red. When your revenues boom, cost control becomes secondary.

Lalu has not increased passenger fares; on the contrary, he has lowered them; private parties are being invited into select areas (hotels, railway stations, shopping malls) but IR has not withdrawn from any of its current areas; the governance structure is unchanged and the same political authority and the same IR bureaucracy has brought about the transformation. Last, but not the least, there is no regulator to monitor tariffs. Yet, a state-owned entity with a monopoly over its services generates a return on capital that would be the envy of the private sector: 20%!

So, yes, IR under Lalu has indeed reinvented itself but not along the lines suggested by the "liberalisers". IR used its technical ingenuity and commonsense, always a scarce commodity. Lalu has proved to be an effective leader, a man who backed ideas put up to him by IR's technocrats. But "liberaliser''? No way.