The expert committee headed by Rakesh Mohan has looked at this very issue and has pointed out that the immediate threat to the Indian Railways is from the competition from road transportation. The report states that road dominance is likely to increase with measures such as the four-lane golden quadrilateral and new expressways, and through the introduction of larger and improved trucks.

Traditionally, the railways have been built as part of an essential public service which should be provided at reasonable costs. This tradition has been upheld at the cost of freight traffic.

As a result, over the last decade the proportion of total production of bulk commodities transported by the railways has gone down for almost all commodities. The annual growth rate measured in `net tonne kilometres' averaged 5.33 per cent between 1984 to 1991 but dropped to 1.86 per cent in the next eight years. One of the reasons for this decline, particularly in the freight business, has been the pricing of railway services. The ratio of average passenger fare to average freight tariff for the Indian Railways is amongst the lowest in the world.

Apart from growing competition, the railway's role of a public service has taken a hit as the fiscal situation of the central government is such that it is incapable of providing the volumes required by the organisation. Since Independence, investment in the railways has been through a combination of internal generation, budgetary support from the government and market borrowings.

The share of budgetary support in the Plan size has come down from from 75 per cent in the Fifth Plan to 23 per cent during the Eighth Plan. With severe pressure on internal resources after the implementation of the Fifth Pay Commission recommendations, the railways do not have investable funds to finance major modernisation and capacity expansion. As a result, finances for the organisation come from sources borrowed at market interest rates in the capital market. This has led to the financial crises that the railways are facing at present. The cost of meeting social obligations under the garb of public service has meant a loss of around Rs 3,200 crore for the organisation.

In addition, investments in unremunerative projects have meant that the rate of growth in revenues has been outstripped by the rate of increase in costs. According to the expert committee report, on an "as-is" scenario constructed by assuming that there are no significant changes in performance, by 2003, the railways would have an operating deficit of close to Rs 3,700 crore.Trends indicate that budgetary support is unlikely to account for more than 25 per cent of the Plan outlay. In this situation, the railways' dependence on borrowings is likely to increase substantially and lease payments are expected to grow from Rs 1,974 crore per annum in 1998 to close to Rs 5,000 crore per annum by 2003.

It is in the light of this situation that the structure of the railways needs to be changed such that it allows the organisation to focus on its strengths and businesses. At present, the railways have not been able to customise their offering to suit the changing needs of customers. This, however, is not going to be an easy task.

According to the report, the railways have faced pressure from four external sources. First, from increasing customer demand to improve the quality and price of services; second, from growing competition from other modes of transport; third, from a public service mindset leading to weak internal performance; and fourth, from the reduction in availability of government funds for investment.

The railways need to be run as a corporation. The absence of a project finance approach makes project implementation uncertain and subject to varying priorities that can be detrimental to the organisation. The expert committee suggests that there is need for a more focussed investment programme that enhances the railways' productivity all round and expands its capacity to cope with the projected traffic growth. Investment expenditures that do not result in additional revenues must, therefore, be eschewed.

The report further adds that a successful corporate planning approach to investment programming is likely to succeed only in a commercial corporate framework where investment programmes and their implementation are closely linked to the returns achieved as well as the financing structure. The railways need to shed their non core activities and adopt a high growth path that is commensurate with the 6-10 per cent growth of the economy.

If the railways continue to function in the present form, the expert committee projects that, within 16 years, the government would be burdened with an additional liability of Rs 100,000 crore, while if they aim for purely re-capturing their lost market share, there would still be a need for government subsidy. However, a high growth path coupled with commercial and customer orientation would be a win-win situation for the government as well as the railways. Not only would private funds flow into this sector but, according to the report, with the growth of the economy, incomes too may rise. As a result, customers will be willing to pay for better quality service.

Modernising the railway system in India will require more than mere efficient running. The system of governance and management of the railways itself must be deeply flawed if even a decade after economic reforms they are yet to start on the journey to modernisation. Even though the expert committee recognises that wholesale privatisation is premature at this juncture in India, the biggest threat to the future of railways, according to the report, is from doing too little too late.