Switching Tracks: Time for Privatisation in the Indian Railways

India’s rail network is hampered by operational inefficiencies and financial pressures. A measured approach, inviting private investment through targeted divestitures or public–private partnerships, while retaining strategic governmental oversight, can unlock its full potential.

Indian Railways (IR) is the backbone of India's transportation, carrying over 6.9 billion passengers annually. However, it is faced with a financial crisis. The IR has a high operating ratio, above 98%, meaning most revenue generated is used to cover operating costs, leaving little for self-investment. Passenger services lose over ₹60,000 crore yearly, and are subsidised by freight profits. This creates a vicious cycle: high freight prices push cargo to roads, which in turn reduces rail revenue, necessitating further price hikes. The impact of this is evidenced by a declining rail freight share from 89% in the 1950s to 27% in 2023. While some of this decline is also explained by improvements in road connectivity, rising freight prices have not helped the railways’ market share.

In an attempt to remedy this, the IR is now changing the composition of their trains by reducing sleeper and unreserved coaches and converting them to air conditioned second and third tier coaches. This is because these coaches are profitable, while the coaches with cheaper tickets are not. However, this further aggravates the demand-supply mismatch that has plagued the IR for a long time. Demand for unreserved and sleeper berths in trains is already higher than the existing supply, and this conversion of bogeys only further reduces supply.

The root of all these problems is funding. Privatisation in its myriad forms offers a solution to this problem, by reducing operational inefficiency and infusing private capital to the IR. This blog examines five methods for privatisation: a complete sell, a partial sell, public-private partnerships (PPPs), corporatisation, and asset monetisation.

Five approaches to privatise
Indian Railways must look beyond budgetary allocations for upgrades. Privatisation can bring in focused investment and better customer experiences, whether in catering, station facelifts or track upkeep, under agreements that reward tangible efficiency gains. This approach delivers quicker modernisation, better passenger amenities and lower costs, while the government keeps the reins on fares, safety and network strategy.

Complete sell 
Complete privatisation, referring to the sale of the entire IR network to private entities, is infeasible. This is because the purpose of the IR is to provide affordable transport to the population, which a private corporation is unlikely to prioritise. Additionally, its importance as a strategic asset and its status as India's largest employer render a move to sell the IR a political slugfest and it is extremely unlikely to ever happen. 

Partial sell of certain businesses
This strategy involves inviting private sector participation in select areas of IR. The IR is a mammoth organisation with many smaller units (often structured as public sector undertakings) embedded within it. Divesting non-core businesses will enhance operational efficiency for both the organisation and its customers. Alternatively, opening these segments to private competition will improve service quality and lower costs for consumers. Some examples of where this could take place include catering, tourism, and hospitality. 

Since the IR does currently depend on its secondary businesses like tourism (alongside freight) to fund its losses in passenger transport, selling these profitable businesses may further push the IR to a red balance sheet. Thus, this step should be taken after the losses in the passenger business are reduced (by following the upcoming ideas) and should be taken with the purpose of improving customer experience on rails, and not purely from a profit point of view. It is unlikely that the IR itself sees profit from competition, but a higher overall value generation as a product of free markets should be the goal.

Another example of where this would work well are lounges. Currently, railway lounges generally either do not exist (in certain stations) or do not have a high standard of customer experience. Allowing private entities to develop their own lounges or to buy and redevelop the current lounges would increase quality.

Public-private partnerships (PPP)
The PPP model allows for the private sector to invest alongside the government. This reduces the upfront cost on the government for building new infrastructure. There exist multiple avenues for the implementation of the same. 

First, train operations. The IR should attract private investment for purchasing new trainsets, or redeveloping its existing ones instead of purely relying on government allocations. Revenue sharing models that retain government ownership of the trains themselves can be developed to incentivise the private sector to invest. Another route of private involvement is to allow private companies to operate trains on the IR network — a method previously attempted by the government. It encountered setbacks in its first rollout in 2020 due to revenue-sharing and investment conditions that were not appealing to private players. In that instance, only two bids were received, one of which came from IRCTC itself. The plan was ultimately scrapped. Further action has been limited on this form of privatisation since the first attempt in 2019.

Second, station operations. Private investment should be attracted to build new stations or redevelop existing ones. This again, is something that has been done in the past, with the Rani Kamlapati (Habibganj) station redeveloped under a PPP model with Bhopal’s Bansal Group, which invested 450 crores. In exchange, they received various different streams of revenue in a revenue sharing model from the IR. This is a great model to rapidly redevelop stations without the need for large amounts of public investment. There has been no other major station development under this model since Rani Kamlapati. The Public Private Partnership Appraisal Committee (PPPAC) had recommended the redevelopment of various stations in 2019-2021, but these projects have not yet been carried out, and this committee has since not recommended any further redevelopment under this model. The reason for this lack of inaction is not clear, as the model seems to have worked well in the Habibganj case.

Third, track laying. The IR network is highly congested, leading to stagnation in the average speed of Indian trains in the past decades. This is due to aging track infrastructure and a slower pace of new track construction compared to the rapid increase in passenger traffic. Route length has only increased by 23% in the 1950-2018 period, as compared to a 1642% surge in passenger-kms. Most of our trains run significantly slower than their max speed, leading to massive loss of productivity. Broader than just track laying, the tracks are outdated and do not support the newer trains like Vande Bharat, which is why even the faster trains on the network rarely ever cross 90 km/h mark. Both these issues are addressed by PPPs as they both primarily require a large influx of capital, for land acquisition in the primary case and for upgrades in the latter. Favorable contracts where appropriate concessions are given to private players for a short-term period would allow the government to speed up its upgrade process.

Corporatisation 
Corporatisation, in this context, refers to restructuring IR to make it operate more like a corporate entity or multiple PSUs to improve on its efficiency, accountability, and commercial orientation. Suggestions in this regard have been made by the Bibek Debroy Committee on Railways in 2015. A few have been implemented as well, with the Railway (Amendment) Bill of 2024 such as providing statutory backing to the Railway Board, and increasing decentralisation through a greater autonomy to general managers of railway zones. 

A key reform is to reduce the Ministry of Railways’ management of daily operations. Currently, the ministry controls everything from ticket pricing to project approvals, leading to bureaucratic delays and politically driven decisions. Corporatisation would shift the ministry’s role to broad policymaking, while operational control, like scheduling, pricing, and project execution, would rest with IR’s board and zonal units. Corporatisation would limit the ministry to policy making, letting IR’s board handle operations. For example, Japan’s JR Group turned profitable only after its transport ministry stopped dictating fares and timetables. Something similar occurred in India when the Department of Telecommunications transitioned from operator to regulator, letting BSNL operate independently as a PSU. Applying this model to IR would be highly beneficial to its operations, and would reduce red-tape and increase operational efficiency.

Asset monetisation
As India’s largest landowner, IR has potential to use these vast landholdings as an asset for revenue generation. With over 11,000 square km of land under its ownership, approximately 43,000 hectares have been classified as “non-core” by the Rail Land Development Authority (RLDA), the nodal agency tasked with monetising underutilised railway land. Leasing these parcels through agreements with private entities offers a two-fold advantage: IR retains ownership for potential future rail infrastructure needs while converting idle land into a revenue stream to fund its modernisation goals. However, RLDA’s progress has lagged, and accelerating leasing processes could significantly improve cash flows for railway projects.

It is important to note that all these suggestions have been tried before. The Indian Railways is a political hotbed, and attempts at reform have been met with resistance previously as well, and they would most likely be met by similar resistance if implemented today. However, reform is a gradual process, and it is imperative that the IR keeps taking small steps rather than slowing down and waiting for a day when massive reforms would be possible. In that sense, these suggestions can all be implemented gradually, and do not necessarily require a sudden major overhaul of the existing system. 

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