Once a formidable force, carrying around 70 per cent of domestic freight in the late 1970s, the Indian Railways gradually lost its dominance to road transport and presently accounts for less than 30 per cent market share. Last year, the Railways formulated the National Rail Plan that envisions achieving a rail-share of 45 per cent in freight transport by 2030-31.

A massive capacity augmentation programme has been launched to cater to the future transport demand. Additionally, the Railways has initiated several marketing policies in partnership with the private sector to enlarge its commodity-basket beyond traditional bulk commodities. For the first time, the Railways lifted 1.5 billion tonnes of revenue-earning freight traffic in 2022–23, clocking a 7 per cent year-over-year growth.

However, this level of growth is not unprecedented — during the Tenth Plan (2002-03 to 2006-07), the CAGR of freight-loading was 8 per cent; but thereafter, the performance of the Railways has been sluggish. For achieving a reasonable 45 per cent market share in the next 7-8 years, the Railways will have to log a CAGR of over 11 per cent in freight-loading. This will be possible only by launching aggressive marketing and competitive pricing policies along with the on-going capacity expansion programme.

For the last 10 years, the Railways has been trying to capture non-bulk traffic, particularly automobiles and containerised movement of other high-value and mid-value commodities but with limited success. Even the diminishing share of the Railways in transporting its ‘bread-and-butter’ price-inelastic bulk-commodities is worrisome and requires urgent scrutiny. Both pricing policies and non-price factors are responsible for the declining importance of the Railways in freight transport, but the former appears to have got scant attention from policymakers.

Two key factors play a role in freight pricing administered by the Railways: cross-subsidising the loss-making passenger operation; and fully-distributed pricing owing to the existence of joint-costs. Both of these translate to suboptimal freight pricing by the Railways. Fully-distributed pricing particularly adds to inefficiency as goods carried by the congested routes are priced less, leading to increased congestion, while the underutilised routes are charged more, keeping these underutilised. The responsibility of price setting is exclusively vested upon the Central Government, that is, the Railway Board, as a result, freight pricing is rigid and centralised in an ever-evolving freight market.

The Railways follows a uniform tariff structure across the country as both ‘cost of service’ and ‘value of service’ are determined nationally. This policy is unable to accommodate any regional variations, and has severely eroded dynamism from rail freight pricing, unlike the trucking industry. Although the Railway Act empowers the zonal railways to set station-to-station rate by providing concessions between a select pair of origin-destination for any commodity, it is used sparingly due to the fear of scrutiny as rail fares are administered by the Government and do not work on commercial lines.

These factors make railway freight rates highly uncompetitive. In fact, the freight rates charged by the Railways are among the highest in the world. In India, there is wide regional variation in road-rates in contrast with the uniform rail-rates throughout the country.

The thin cost advantage of the Railways vanishes when the added costs associated with first and last miles are taken into account; this has been highlighted by Economic Survey 2017-18, too.

Dynamic tariffs

It is time the Railways initiated action to make its pricing system competitive. The Railways, operating as a monopoly since its inception, should make tariffs dynamic to take on its strong competitor, the road sector, which quotes tariffs on a daily basis. Internationally, most of the major railways have migrated to market-driven tariffs as well as contract-pricing on mutually agreed terms.

In the passenger category, the Railways has implemented dynamic pricing in a limited way, with some success. However, the tariff-setting in freight business largely remains unchanged with continued class-based uniform rating system.

In the absence of real-time determination of costs service-wise, the Railways will find the introduction of marginal-cost pricing difficult. However, it may consider such pricing on routes with excess capacity. This will not only allow the Railways to cover the operational expenses, but also help in attracting new business on underutilised routes.

The Railways is in the process of migrating to accrual accounting and a performance-based costing system, and it is expected that deficiencies of distributed-cost pricing may then disappear.

However, reforming the tariff policies must continue till the new accounting system is in place, which may take longer than expected.

The Railways may consider introducing the ‘maxima-minima’ pricing system to infuse dynamism in freight pricing. Under such a system, the Railway Board will set a maximum (possibly aligning with ‘what market can bear’) and a minimum (‘break-even’), and the zonal railways will be empowered to set freight prices within such a price range.

On experimental basis it can be explored for commodities like cement, where there is stiff competition from the road sector. The freedom to the zonal railways to set freight tariff without the fear of any scrutiny will usher in dynamism and competitiveness. These freight-pricing reforms will complement the present marketing and infrastructure policies of the Railway Board.

Chakraborty is Associate Fellow, TERI, and Prakash is Distinguished Fellow, TERI, and a former Member (Traffic) at Railway Board

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