Railways, Pandemic And The Law Of Unintended Consequences

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Oct. 4, 2021

Transportation is amongst the sectors of the economy that has suffered the worst due to Covid, last year as well as this year due to the second wave. Their revenues have been decimated and cost structures have gone haywire. But the Railways, despite carrying far fewer passengers are an exception. Despite the pandemic, they are on track to earn more revenues this year compared to the pre-pandemic levelsAnd the reason for this is the law of unintended consequences.  


In the first 5 months of the current financial year (April – August), the Indian Railways have carried just 0.9 billion passengers. During the same period in 2018 and 2019, the Railways had carried 3.5 billion passengers. So, the passenger traffic has declined ~75% compared to the pre-pandemic levels. Suburban passenger traffic has declined slightly less than non-Suburban traffic - suburban traffic has declined by 73% while non-suburban traffic has by 77%. Both broadly, both Suburban and Non-Suburban passenger traffic has declined at broadly the same level.  




While the pandemic has meant the Railways is carrying far fewer passengers, it is carrying far more freight. In the first 5 months of this year (April – August), the Railways carried 13% more freight (volume terms) than they did during the same period of 2019 or 2018. This is not because the economy is growing in double digits compared to 2019. Far from it. Most economic indicators in this period suggest either flat or negative growth compared to 2019. The reason for this is the shift in freight traffic from Roads to Railways.




Global Crude Oil Prices have increased sharply in the last few months. The price of the Indian basket of Crude Oil has increased by almost 50% between December-2020 to September-2021. In addition, the Government had also increased the specific excise duty on Retail fuels last year. Consequently, diesel prices have increased sharply, and consumption has correspondingly been impacted. Thus, in the first 5 months of the year (April – August), Diesel consumption is 15% lower compared to the same period of 2019 or 2018. The economic activity in the country from April to August this year is not 15% lower relative to 2019. So there has been an element of shift of freight traffic away from Roads and to Railways. And a large part of this is due to higher diesel prices due to increased excise duty levied by the Government even in the fact of high crude oil prices resulting in record high Diesel prices.




Railways have also benefitted from changing mix of freight volume. Thus, the buoyancy in steel sector globally has meant more Iron ore being transported by Indian Railways. In the first 5 months of this year, Iron Ore transported by Railways is more than 15% higher than during the same period of FY20.


The net result of this is that the freight revenues of Railways are 18% higher YTD compared to 2019, more than offsetting the decline in passenger revenue. The Total revenues of Railways are thus modestly higher YTD compared to 2019. More importantly, the operating surplus of the Railways YTD this year is slightly higher than during the same period of FY20!  




Assuming there is no third wave of the pandemic (or at least not a one), passenger traffic and thus passenger revenues will increase sequentially. Thus, the trajectory of revenues will improve. With operating expenses of the Railways largely fixed, Railways will benefit from operating leverage and thus generate resources for investments. The Railways thus clearly do not have the pandemic as an excuse for not undertaking Capex!

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