In today’s Finshots, we tell you why the Indian Railways can’t quite stay on track with privatisation.

The Story

The Finance Minister peppered her Budget speech with a few announcements on public-private partnerships (PPPs). You know, where the government teams up with private firms to fund, build and operate infrastructure while sharing risks and rewards. But those announcements aside, something interesting caught our eye. The government is looking for private operators to take over nearly five waterway terminals that have been run by the Inland Waterways Authority of India (IWAI) for years. These terminals help transport goods and passengers through rivers, canals and other water bodies crisscrossing the country.

And that got us thinking. The government has embraced PPPs in sectors like inland waterways and quite successfully in airports too. But when it comes to Indian Railways, the story is quite different. Attempts to bring private players on board haven’t really worked.

Why?

Well, it’s not like the government hasn’t tried it.

Back in 2019, it floated a grand plan. It wanted private companies to run about 150 passenger trains on over 100 major routes. The idea was to modernise the system that was dominated by the government, improve services and attract investments worth ₹30,000 crores. And it sounded like a great idea.

But it flopped because when the government invited bids, private companies barely showed up. Only about a quarter of the routes got any interest, and by the final round of bidding, just two players remained, one of which was the government-backed IRCTC. And since IRCTC was willing to offer a higher revenue share to Indian Railways, it was bound to win, making the whole process of “private participation” feel a bit pointless.

And why did private players shy away in the first place?

Well, they were expected to finance, buy, operate and maintain the trains entirely on their own while also sharing revenue with the Indian Railways. Kind of a high risk (high cost), low reward (low profit) deal. Not very tempting for private companies. And that’s why the plan fizzled out, forcing the government to go back to the drawing board.

But let’s say for a moment that this plan had actually worked. What would happen next is there would still be plenty of backlash.

One of the biggest fears would have been a steep rise in fares because private players invest heavily in upgrading infrastructure, and they’re not exactly keen on waiting for years to turn a profit. Just look at aviation. International Air Transport Association (IATA) points out that after certain airports were privatised, charges like parking fees for flights, landing charges, passenger service fees and even lounge fees shot up. And it’s only natural that these costs inevitably trickled down to passengers through higher airfares.

And it’s not just aviation. Over a decade ago, the Delhi Metro Rail Corporation (DMRC) partnered with Reliance Infrastructure to develop Delhi’s airport metro line on a 50-50 investment-sharing basis. But when the line opened, Reliance set fares so high that passengers stayed away from using the service. With lower-than-expected footfall and shrinking profits, Reliance pulled out. And the end result was that the DMRC had to step in, slash fares to ₹50 (a third of what Reliance charged) and like clockwork, passengers returned.

So, how do we make privatisation, or rather, PPPs work for Indian Railways?

Well, to figure that out, we need to ask — are we solving the right problem? The real question isn’t whether privatisation is necessary. It might be a few years down the line for better managed and high-speed trains. But before anything else, Indian Railways has to figure out how to effectively manage its costs.

You see, the Indian Railways doesn’t cover all its expenses on its own. As of 2024, its operating ratio stood at a hefty 98.43%. This simply means that it spends over ₹98 for every ₹100 it earns. This money only covers things like repairs, maintenance, staff salaries and pensions. So almost all of the railways’ revenue goes into keeping the trains running. And if the Indian Railways wants to fund anything beyond these basic operations, like capital expenditure projects, it has to dip into the extra support the government provides through the budget. In short, the railways’ earnings aren’t enough to fully sustain itself. In fact, if you check your railway ticket, you’ll see that, on average, the Indian Railways only recovers about 57% of its operating costs from ticket sales. And it gives that running passenger trains is a money-losing business, and these losses are covered by profits from freight operations.

One reason this might be is because train fares haven’t kept up with the growing economy. To put it into perspective, the Comptroller and Auditor General’s (CAG) 2023 report on railway finances shows that between 2017 to 2022, rail fares increased by just 3% a year on average (excluding the pandemic years, when fares were spiked as a one-off to discourage travel). Meanwhile, the economy grew by 6-7%.

So, perhaps one thing the railways really needs to do is raise fares gradually every year. Agreed that a price hike might sting, just like we saw with privatised airports. But the difference here is that railway passengers are massive in number (a whopping 670 crores) and travel frequently. And even a slight fare increase could generate huge revenue without burdening individual travelers too much. That extra revenue could help improve services and infrastructure, and bring things up to speed with the economy. And maybe these small, strategic price hikes could also nudge private investors to finally step in and help Railways turn a corner.

As the Bibek Debroy Committee pointed out in its 2015 report, “The cross-subsidisation of low passenger fares by artificially high freight rates has led to a shift in favour of road transport, for both freight as well as short distance passenger traffic. It needs to be recognised that most passengers are willing to pay higher fares, albeit only if accompanied by enhanced services.”

Apart from fares, the railways need to separate its non-core functions, like hospitals and railway schools, from its main operations. Right now, paying salaries and pensions takes up around 70% of the Indian Railways’ overall operational costs. If private companies took over these services, it could save the railways a lot of money while focusing on core operations.

And finally, the railways need to get its books in order. Currently, its accounting practices don’t match with what other commercial organisations follow. If you ever tried reading the Annual Report of Indian Railways, you’ll know how complicated and hard to follow it can be, mostly due to its non-standard approach. So to make the railways more appealing to private investors, its accounting system needs a change.

Now, we know what you’re thinking. Most of these solutions sound pretty far-fetched. But here’s the thing. These solutions aren’t from our pocket. Expert committees have been recommending them for years. 

And if you think India’s rail network is also held back because of its large population, just look at China. It has a massive population too, yet it has managed to transform its railways into one of the most advanced in the world.

In fact, China has done what experts have long recommended for India. They’ve separated non-core functions, streamlined operations based on productivity and even stopped providing below-cost services to passengers. Sure, India’s economy and rail networks aren’t at the same scale and operate differently. But if we ever want to grow like China’s rail network, we have to start somewhere, even if it feels a bit controversial or intimidating at first.

And maybe, just maybe, after taking these first steps, we’ll be in a better position to talk about privatising trains.

Until then...

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