Sunil Jain: Happy not to be at IIM (A)
Whether the country's populace was aware of the turnaround in the Indian Railways' fortunes under Lalu Prasad is an open question, but now thanks to the efforts of Prof. G Raghuram at the Indian Institute of Management, Ahmedabad, this is no longer in doubt. After he prepared a case study on this, and invited Lalu to lecture students, newspapers across the country had pictures and stories of this, including Lalu's famous comparison of the Railways with his cow at home —"if you don't milk it fully, it will get sick."
Sadly though, the case study by India's top management school is a lot less incisive than one would have hoped. While it details Lalu's contribution in terms of increasing the loading allowed in railway wagons, it ignores the major problems the railways face and blithely talks of how the sustainability of the turnaround depends on the political leadership—and this, we've just been told, is to run the Railways the way Lalu has. The study does not even look at Lalu's role in perspective—as my colleague Subir Roy pointed out in his column last week, the "operating ratio" (the share of revenue that's consumed by operating expenses), which had begun to improve since 2002-03, is still worse under Lalu than it was under CK Jaffer Sharief and Ram Vilas Paswan in the mid-90s.
Indeed, the larger study by Prof. Raghuram (the co-authored case study is a detailed analysis of a section of this) begins by talking of how, as compared to a planned investment of Rs 60,000 crore in the 10th Plan period (2002-07), the stupendous turnaround under Lalu has resulted in a situation where the Railways are now looking at investments of Rs 350,000 crore over the next eight years! Well, what is one to make of the figures put out by Lalu himself in his budget—after a stunning increase of 18 per cent in freight collections in 2005-06, Lalu is budgeting for a hike of just 10.7 per cent this year!
But perhaps I'm being too harsh. After all, the last of the suggested questions at the end of the case study is about whether what we've seen is really a turnaround and, if it is, how sustainable it is. That is, the good professor wants students to do some research themselves.
So what caused the turnaround? Is it sustainable? And, is the country paying a heavy price for this? What caused the turnaround is well-known. It was Lalu's decision to allow the Railway Board to increase the loading of wagons by around 10 tonnes—while perfectly safe, this 18 per cent hike in freight- carrying capacity is what really helped Lalu. Had freight earnings in 2005-06 also risen by just the 11.4 per cent they rose in 2004-05, the operating ratio for 2005-06 would have been 86.8 per cent, as compared to the much-better 83.7 reported. Interestingly, the IIM (A) study points out that, even with the higher freight earnings, had Lalu not shifted some expenditures to another head in the last budget, the operating ratio for 2005-06 would have been 86.6 per cent instead of 83.7 per cent. This means the reduction in the operating ratio under Nitish Kumar's tenure (from March 2001 to May 2004) is higher than the reduction during Lalu's first two years—given that Lalu has projected a worsening of this ratio this year, the comparison isn't going to get any better!
Whether this is sustainable depends upon whether Lalu's cow can be milked any more. The reason why Lalu's back to a sober growth figure this year is that loading levels cannot be hiked anymore—while it is true most railway tracks can take up to axle loads of 25 tonnes, the Railways do not have wagons that are capable of this. It's true other countries like the US even go up to 40-tonne axle loads, and have much lighter wagons (this allows a greater load to be put on the wagon while the axle load on the track remains the same), but getting to achieve this is a long-term thing since it means changing over 500,000-odd wagons owned by the Railways and strengthening the track.
What of the cost the country is paying for this turnaround? Since the Railways lose heavily on passenger traffic (the ratio of passenger tariff to freight tariff in India is 0.33 in comparison with 1.3 for China, 3.07 for Germany and 11.06 for the US), they make this up by overcharging on freight (on average, our rates are twice that of China, and productivity a third). In the case of coal, for instance, the Railways charged Rs 13,134 crore as freight in 2004-05 on a total of Rs 30,660 crore of coal produced by Coal India, making this one of the most expensive forms of freight anywhere in the world. Indeed, the IIM(A) paper brings out another interesting point, that while the Railways claim to have reduced freight rates, the rates for iron ore rose 55 per cent last year. Put another way, you could argue that if the Railways didn't overcharge on freight, Coal India would be a healthy company, and Indian coal would actually be economic to use.
If you're a monopolist and can hike tariffs at will, and the economy's growing fast enough to absorb the cost hike, the turnaround's hardly that stupendous anymore. Certainly not enough to get India's premier management institution so excited.
Laloo ki pathshala
Much of the breathless reportage on railways minister Lalu Prasad's performance at IIM-Ahmedabad has focused on his rustic charm bowling over students and faculty alike on how he turned the Indian Railways around. There was frequent mention that he considered the railways a "Jersey cow" that needed to be milked to extract profits, but relatively less was reported on exactly what he did to turn it around.
A closer perusal of two case studies by G Raghuram of IIM-A, however, offers valuable clues. True, the case studies are replete with references to Lalu's "non-interfering nature in dealing with the railway board" or his "caring attitude towards staff and union" and so on.
But the subtext is the conjunctural nature of his achievement. This conjuncture is India's booming GDP growth of 7.9 % expected in 2006-07, with the average touching 8%-plus over the last four years.
It is this environment that is largely responsible for the turnaround in the form of buoyant revenue growth, especially freight earnings, with freight accounting for 67% of earnings growth.
As the freight business is a volume play, Lalu focused on the higher-volume segment and raked in the moolah through market-oriented tariffs. Wagons expected to carry between 58 and 60 tonne were already overloaded up to 80 tonne. Lalu wanted this revenue leakage plugged.
His oft-quoted logic that "if you do not milk the cow fully, it falls sick" was responsible for higher axle loading from 20.3 tonne to 22.9 tonne, which resulted in higher freight tonnage and earnings in 2005-06.
PICK OF THE WEEK
• Economy
RBI's decision to treat lending to SEZs or acquisition of units in SEZs as exposure to commercial real estate will only raise the cost of funds for SEZ developers but also reduce the availability of funds. Now, a higher provisioning and risk weightage will require banks to allocate more capital towards advances to SEZs and compel them to increase lending rates.
• Corporate
Idea Cellular, is planning an IPO that it intends to use for raising about Rs 1,400 crore–Rs 1,800 crore. DSP Merrill Lynch and JM Morgan Stanley have been appointed as lead managers to the issue, according to sources. The IPO is expected to happen in January or February next year.
• Markets
Sebi has made the criteria for exit more flexible than those for entry into the stocks of the derivatives segment. This is with a view to preventing the frequent entry into and exit from such stocks. A Sebi circular stated that for a stock to become ineligible, the criteria for market-wide position limit will be relaxed up to 10% of the criteria to become eligible for derivatives trading. Sebi added, the trading member or FII or mutual fund position limit in equity index (option and futures contracts) shall be higher than Rs 500 crore.
• International
A coup was declared in Thailand by General Sonthi Boonyaratglin on September 19, while Prime Minister Thaksin Shinawatra was out of the country. The general said, Thaksin had been pushed out in line with the wishes of the people after months of political turmoil. Thailand's new military ruler pledged to resign from power in two weeks and restore democracy in a year.
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