By Kriti Upadhyaya —
Status: Incomplete — In 2017, the Union cabinet approved the formation of the rail development authority (RDA). This reform further requires an executive order, and an initial allocation of $6.9 million to set up the RDA.
Low Difficulty: Executive Order, With Opposition — The reform requires political will. Opposition will come from the political class that has capitalized on subsidized passenger fares that feeds their vote banks. Opposition is also likely from Indian Railways which will lose regulatory clout.
This is the fourth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.
Currently, the Indian Railways is its own regulator. When established, the RDA will be an independent regulator with “the purpose of orderly development of infrastructure services, enabling competition and protection of customer interests”. The RDA will be “entrusted with making regulations, setting performance standards and determining tariffs. It will also adjudicate on disputes among licensees/private partners and the Ministry, subject to review in appeal”. Given the Indian Railways financial losses and need for investments, the RDA will also incentivize private players to invest more in infrastructure by allowing competitive pricing for freight and passenger trains. The importance of RDA thus lies in creating a more competitive, efficient, and consumer centric railway industry.
The need for a tariff regulator has been debated at least since the Railway Convention Committee (2000) to the Bibek Debroy Committee Report (2015), which called for a rail regulatory authority with over-arching functions. On April 5, 2017, the union cabinet approved the formation of the RDA. Since then, no executive order has been passed to constitute the body.
Setting up the RDA boils down to political will, considering that fare prices are currently decided by the Union government through the railway ministry. The RDA, along with various advisory functions, will have mandate over fare prices for passenger and freight rails. Decisions on fare pricing have until now been politically motivated. Passenger fares are highly subsidized through high freight fares. This not only decreases the competitiveness of the Indian Railways which is currently operating at an operating ratio above 95 percent as its expenses are much higher than its revenues, but also keeps out private players from venturing into the railways. The concept note by the Indian Railways on which the RDA was formed noted that, “investors have generally been shy of investing in an industry where far too much is still being done or controlled by Government and the risk/return trade-off is not always favorable.”
The passenger business of the railways regularly loses money, and the freight business is overpriced, making it lose market share to road freight (in India tonnage share of road:rail is presently 65:35). The declining revenues of the railways as a consequence of these poor pricing decisions also means that capital investments suffer, further holding back growth. In the 2019 budget, Finance Minister Nirmala Sitharaman, said that the railways needs $703 billion in investment by 2050. The railways has also targeted a 50 percent share of total freight traffic by 2031-32. Both these goals require private investment.
Private investors are fearful of entering a market where the Indian Railways is the primary competitor and the regulator. Thus, even though the government may invite more public private partnerships in the railways, the response will be lukewarm from private players until an independent RDA is set up.
The year 2019 saw the highest capital expenditure by the Railways at $22.4 billion. However, reaching the 2050 target requires tripling that amount. With more than 40 percent of the railway’s budget already being financed by the government, and the declining revenues of the rail, this seems unlikely unless the private sector takes the onus on itself. Setting up the RDA will make “passenger and freight fares commensurate with costs”. This would not only make the railways more profitable, but also give private players enough incentive to move into the railways and make capital investments in profitable sectors.
Related industries like logistics and the manufacturing sector will see substantial growth with competitive freight pricing. Removing political considerations from pricing will help resolve inefficiencies, increasing railway freight business. The passenger segment of the railways can also be made profitable with the addition of services that improve customer experience and create jobs.
The RDA can save the Indian Railways from its current vicious cycle of financial troubles where revenue generation is low and operations are crippled through cross-subsidization between passenger fees and freight. The lack of revenue leaves little for capital investment to propel the lucrative freight business or provide better service to passenger traffic. The government, understanding its own limitation in funding, is calling private players. However, private industry will not be incentivized unless competitive pricing is introduced.