International Joint Ventures and Merger & Acquisitions

Indian Railways: Privatisation a step in the right direction

July 27, 2020

The Government has recently declared the privatisation of the Indian railways on 1st June, 2020.

The Government has recently declared the privatisation of the Indian railways on 1st June, 2020. The Railway Ministry has announced that 151 trains in 109 pairs of routes shall now be operated within the private sector and the investment undertaken by the private sector is Rs. 30,000 crores. Furthermore, amongst other details, one of the main aspects is that the driver and the railway guards shall be the only employees from the railway sector and the rest of the other employees shall all be from the private company operating the train. These private companies shall have the free choice of acquiring the trains and the locomotives from the source of their own choice.

The operation of the private sector within the railways will begin from April, 2023 and the manner of operation shall be identical to that witnessed within the airline sector. This means that once the private entities begin operating, these trains akin to the airlines would imply that people would have to pay for their preferred seats, extra baggage as well as the on-board services, etc. Furthermore, the railway ministry has permitted the private train operators the right to fix the respective fares. These fares within the private sector shall be highly competitive in nature and would ensure a greater demand for railways as a means for travel. Moreover, such privatisation will ensure a greater level of professionalism and punctuality within the sector as well.

The move to incorporate the private sector more in the economy and to boost the corporate sector of the country is much required, especially in a space as large and dominating as the railway sector. Any private entity investing Rs 30,000 crore will be expecting a profit from such a huge investment as is in the nature of all corporate entities which puts just one setback, which is of the increase in the railway prices, thereby affecting the common man.

The privatisation of the railway sector will however, bring about increased employment opportunities as well, thereby, bridging the gap between the number of people unemployed and employed in India. It is a move which is sought for enabling a higher level of security amongst railway employees through newer means and varied avenues available for earning income within the sector.One of the primary arguments which the government has given for privatising the railway sector is that during the year 2018-19, 8.85 crore passengers were in the waiting list and the Indian Railways was able to provide only 16 per cent reservation out of these waiting list passengers, and hence for furthercapacity augmentation, private companies are now permitted to operate the Railways in India.

It was noted that, immediately after the announcement of the Indian rilways to hand over 109 routes to the private sector, on July 2, 2020 the Ministry of Railways issued an order for the rationalisation of expenditure which primarily stated that there will be a freezing over the creation of new posts except for safety measures. Further, surrender the newly created posts if recruitment has not taken place against those posts, surrender 50 per cent of the existing vacancies, was what was reported by the government official.

Major Takeaways of the Privatisation Project:

  • Once this project has been implemented thereafter, at least 151 modern trains will be newly introduced and further 109 pairs of routes shall be planned out for the private train operations.
  • These sets of new trains shall be the responsibility of the private contractors and thus will be brought and maintained as per their rules and standards.
  • Since these trains shall now be privatised, the private contractors have the right to fix the fares according to the services rendered by them. Therefore, these fares will now be at a range of competitive prices, aiming to boost the profits within the railway sector and thus the private companies and these fares shall compete with one another to bring the best service possible at the most reasonable rates for the end users.
  • However, private participation in passenger train operations will only constitute a meagre 5% of the total operations of railways whereas 95% of the trains shall still be run under the Indian Railways to safeguard the interest and budget of the common man who may not be able to afford the luxuries brought in by the private companies.
  • Further, since privatisation in any sector involves large investments due to a complete makeover of the basic structure of the said sector, the investment for the said project is no less that Rs. 30,000 crore.

Reason Behind Privatisation of the Railway Sector:

  • One of the primary reasons behind this structural change from government control over the Indian railways to private corporate control is due to the need to grow the economy on a large scale and compete with nations like Japan and China, wherein privatisation of the railway sector ha helped bolster the economy on a large scale
  • The need to provide world class services as is seen within the airline department and to ensure a certain standard, the government decided to introduce private competitors to aid with the revamping of this sector.
  • This shall also lead to a greater degree of competitiveness within the industry which was not seen prior to privatisation, especially within the railways sector. The main goals still remains to develop the basic infrastructure of the railways in India and to provide travel services to every passenger on board. To develop India’s railway infrastructure to provide travel services to all its passengers.
  • As per the data recorded for 2019-20, the Railways ferried 8.4 billion which amounts to a total of 840 crore passengers in 2019-20. However, due to infrastructural shortages and lack of basic provisions, nearly five crore out of these passengers could not be accommodated which means that their wait-listed tickets were cancelled ultimately leading to widespread dissatisfaction and a lack of trust within the railway sector.
  • Furthermore, in times of the busiest seasons like in the summers, almost about 13.3% of the passengers were not able to get confirmed reservations, which again threw light on the lack of management protocols within the industry leading to more chaos than structure.
  • Thus the need for privatising this sector is almost an emergency for bringing about much needed faith and reforms within the railway industry. With the induction of modern technology there will be a further shortaening of the time spent in transit and moreover, these measures will also balance the deficit we now see in the demand and supply of the train tickets.

Benefits of Privatising the Railway Industry

It is very evident that the benefits brought by such a move will far outnumber any discrepancies or disadvantages. These can be better explained below:

  • Privatisation brings in the corporate structure which is highly professional in its conduct. Meaning that there will be a hundred per cent confirmation of train tickets and faster trains available for passengers, resulting in much desired satisfaction of the end consumer.
  • These trains will be structured with higher grade of technology, making them faster and providing a higher degree of safety to the travellers.
  • The competitiveness seen within the private corporate structure would also reduce the cost of maintenance and the cost of travelling due to the existence of competitiveness in the market. Many private players are expected to cash in over the benefits of staking a claim in this industry, increasing the supply of better services.
  • At present, the train coaches are required to be maintained and serviced after every 4,000 km. However, modern train coaches do not require such frequent checks and servicing due to their superiod quality and thus these train coaches will only require due maintenance after running for 40,000 km or once or twice in 30 days.
  • Clearly, this move is certain to bring about a reduction in the cost for the railway industry. At present, this industry is running in losses. In the near future, with privatisation, this sector is expected to make large scale profits.
  • Privatisation will also result in the provision of revenue to railways for future operations.
  • The private entities responsible for the specific trains will be liable to pay the Railways fixed haulage charges, energy charges as per actual consumption and a share in gross revenue determined through the bidding process, which is a huge advantage for this sector.
  • An RFQ had been issued under the “Make in India” policy. This implies that these train coaches would still have to be manufactured in India.
  • It is clear that with the introduction of such new services, programs and products there will be large scale creation of newer jobs in the market and thus the utilisation of local components in manufacturing.

Expectations of this move:

Privatisation of the railways operations will clearly require newer institutional frameworks in place since the old structure will no longer be adequate to accommodate such a huge shift in the sector. This means that while the infrastructure will remain under the government's monopoly there would be a higher share in the market for service providers.

Moving ahead, we can determine that the main Railways functions can be Corporatized rather than privatized. This will be more beneficial due to the following reasons:

  • Corporatization basically refers to the restructuring or transformation of a state-owned asset or organization into a corporation. These organizations have a board of directors, management, and shareholders and thus it helps them stay accountable for any losses or impediments in the service or product they are required to provide.
  • However, unlike publicly traded companies, the government is the company's only shareholder and thus the shares in the company are not publicly traded whatsoever.
  • It is clear that there is a huge need to modernize the railways which still runs on ancient parameters and thus necessary measures are required to be brought in for reimbursing the social costs as soon as possible in order to ensure that the resources of the railways are better allocated and the facilities are upgraded from time to time as and when there is a need for upgradation.

Thank You!

We have received your message and we appreciate you writing to us.
Our team will look over the details you have shared and will get back to you shortly.

Need Help? Get in Touch

Thank you for your interest. Write to us with your enquiries, questions or request a meeting with an expert to discuss your potential project. Our team will review and revert back shortly.

Invalid Captcha