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Feb 20, 2009 at 04:44pm IST

Know how Lalu made Indian Railways profitable

How did the man who bankrupted Bihar turn around railway finances to deliver a cash surplus of Rs 25,000 cr in 2008 from bankruptcy under Mamata Bannerjee in 2001? Lalu Prasad’s rustic wisdom and native intelligence is celebrated in the book, Bankruptcy to Billions by Sudhir Kumar, his IAS-qualified Officer on Special Duty and Shagun Mehrotra, a doctoral student of Columbia University. But behind the change of fortunes is a sound reform strategy, and the passion of a dedicated band of officials to execute it.

When Lalu took over, there was anxiety that he would turn Rail Bhavan into Bihar Bhavan. On a visit to Delhi, his brother-in-law would not settle for anything less than a Honda City from the Railways, to take him around.

The same guy ensured that the Rajdhani was diverted to the platform he was on, in Patna, putting passengers to inconvenience. His father-in-law was caught traveling in a class higher than he had paid for.

HOW DID HE DO IT?: His political mandate, 'no hike in passenger fares, no retrenchment or privatisation.'

Putting an end to such episodes of political interference was essential, the author say, for Lalu to earn the trust of his officials and for them, in turn, to deliver on his political mandate, which is, “no hike in passenger fares, no retrenchment or privatisation.”

The reformers realised that every decision had to meet the market and societal value tests. Cost-cutting was no option. Jack Welsh’s philosophy – fix, sell or close down – might work in GE but not in a politically-sensitive department employing 1.4 million people. Most items of cost, whether salaries, or the price of diesel are beyond the control of the Railways.

The alternative was to spread the cost over a larger volume of traffic. So the reformers decided to run faster, longer and heavier trains. Faster did not mean higher speed, but quicker turnaround, by, for instance, reducing detention time and frequency of inspections.

Carrying capacity per train was doubled by raising the axle load and changing the structure of wagons. When concerns about safety were raised, Lalu stepped in to overcome the aversion to risk.


Freight rates, except that of salt, were politically-neutral, so a 5,000- page tariff manual was hacked down. Rates were raised for door-to-door cargo like iron ore, where the railways were more competitive than trucks, and reduced for station-to-station commodities like steel, where they were not.

Over a five year period, with small, quick payback investments, the same network delivered 300 million tonnes more. The cost of carrying a tonne of cargo over a kilometre fell by seven paise over eight years, despite inflation; revenue rose by 19 paise.

A hike in passenger fares was ruled out, but there was no bar on raising a train’s yield. This was done by packing more people in longer trains with more berths. While the cost per passenger per kilometre rose by one paise over eight years, earnings increased by three paise.

The reformers also found that only a fifth of the investment or operational decisions were politically-sensitive, allowing market principles to be applied for the rest. They realised that the bane of the railways was not so much political interference as rampant departmentalism. Lalu’s contribution was to break the fiefdoms and get the organisation to work to a common purpose..

The reformers say that in a politically-sensitive department, phraseology and posturing matter more than policy. Thus Lalu, who said, “privatisation over my dead body,” broke the monopoly of Concor in container services and roped in 16 private players. There is no place for radical reform; incrementalism works better. And there is no substitute for accomodation and compromise.

Vivian Fernandes is Editor-Economic Policy with Newtwork18.