‘Game changing’ Budget proposal on railways to help cut logistics costs by half

Indian Finance Minister Nirmala Sitharaman has allocated more than $15 billion for the Railways in her Budget for 2021-22, a 57 per cent increase over the figure for the current year. But the really game changing decision is the one to allow greater private participation in the dedicated freight corridors (DFCs), including by asset monetisation.

This is expected to improve efficiency, lead to faster adoption and integration of the latest technologies. This will help improve the logistics infrastructure in the country and reduce the cost of transportation, thus, improving the overall competitiveness of Indian businesses vis-à-vis their global rivals.

This move is much needed as many experts feel the Indian Railways, the world’s second largest, is punching way below its weight. It has a share of 26 per cent in the country’s total freight movement, indicating that there is significant room for it to improve its market share.

Unless urgent steps are taken to make this happen, the share of rail could fall to 24 per cent once the Bharatmala network of highways is completed, says the National Rail Plan, which is a blueprint to develop capacity, infrastructure and enhance rail freight share ahead of the demand. It is also a roadmap to develop capacity by 2030 for a “future ready” network that will cater to growing demand up to 2050.

“The projected potential rate of growth of freight traffic on Indian Railways indicates that rail traffic has potential of almost 2.5x growth over the next decade, subject to improved logistics performance on rail,” says the plan.

The total freight movement by road and rail has grown 75 per cent from 2007-08 from 2,327 million tonnes to 4,074 million tonnes in 2018-19. Of this, freight carried by railways increased 51.3 per cent from 768 million tonnes in 2007-08 to 1,162 million tonnes in 2018-19. Freight carried by roadways jumped by a much higher 86.72 per cent from 1,559 million tonnes to 2,911 million tonnes over the period under consideration.

Suneet Sharma, the Chairman and Chief Executive Officer of the Railway Board has called her Budget “transformational”. Addressing a press conference, he said: “This Budget is a different budget altogether. It is a transformational budget, it is a future-ready budget for Railway, it is path-breaking budget.”

Such gushing praise is not undeserved. The Budget contains a game changing proposal to involve the private sector by monetising parts of the dedicated freight corridors that are being built across the country.

The Indian Railways is building the Western and Eastern Dedicated Freight Corridors, from Dadri near New Delhi to the Jawaharlal Nehru Port in Mumbai and from Ludhiana in Punjab to Dankuni in West Bengal, respectively, to decongest regular rail routes and to increase the average speed of goods trains from 20-25 kmph at present to 65-70 kmph.

The plan envisages more than doubling the load carrying capacity of each train from an average of 5,400 tonnes at present to 13,000 tonnes by using trains that are twice their current length of 700 metres.

This combination of higher speeds and greater carrying capacity, along with greater competition as a result of private sector participation, is expected to lead to a reduction in freight charges by about 50 per cent.This can, potentially, change the face of the logistics sector in India, force trucking companies to become more efficient as a result of increased competition from the railways and also, potentially, stave off the challenge posed by the nascent but growing inland waterway system.

This can, potentially, change the face of the logistics sector in India, force trucking companies to become more efficient as a result of increased competition from the railways and also, potentially, stave off the challenge posed by the nascent but growing inland waterway system.

In fact, going further down the road on private participation, the Indian Railways will implement the 538 km last leg of the Eastern DFC from Sonnagar in Bihar to Dankuni in West Bengal as a public-private-partnership (PPP) project.

The two DFCs and the involvement of the private sector will ensure that millions of businesses and people in the landlocked hinterland will get their supplies of foodgrains, manufactured goods, inputs and manpower faster and at much cheaper rates, improving the overall efficiency and cost of doing business across large parts of the country.

According to a recent study by CII and Arthur D Little, the cost of logistics in India is 13-14 per cent of GDP, compared to 7-8 per cent in the US and Europe. This adds to the cost of doing business in India and makes Indian products and services uncompetitive globally.

The study suggested steps should be taken to increase the share of railways in the country’s logistics modal mix to 50-55 per cent, leaving a share of 25-30 per cent for the roadways sector and 20-25 per cent for waterways.

The Budget’s vision of involving the private sector in the DFCs is a step in that direction.