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Getting India’s
railways on track
To sustain India’s rapid growth, the country’s rail-
roads must become more efficient—and the best
way could be restructuring, not privatization.

India’s economy is growing fast, and the creation of

an efficient transportation system is essential to sustain that growth. India’s
national railroad will therefore have to meet the rapid acceleration of the
demands of the country’s industry and freight customers for reliability and
service. The railroad must transform itself from a lumbering government
monopoly into a more efficient, customer-focused organization—and the
best way to do so may be restructuring rather than privatization.

The scale of the Indian government’s challenge is as huge as the country

itself. Indian Railways, running for nearly 150 years, is one of the world’s
biggest railroads by such measures as passengers and freight carried
(Exhibit 1). It has a giant public-service obligation: in India, trains are the most

EXHIBIT 1

Indian Railways: Huge by any measure

Billions of freight-tonne kilometers, 19981 Billions of passenger kilometers, 19982

Chinese Railways 1,226 Indian Railways 380

Railways of the
901 Chinese Railways 369
Russian Federation
BNSF (United Japanese railway
States)3 763 companies4 243
Railways of the
Indian Railways 284 Russian Federation 97

CSX (United States) Egyptian National

268 65
Railways
Norfolk Southern
215 SNCF (France)5 64
(United States)
Canadian National 164 German Railways 59
Railway

Ukraine Railways 159 Ukraine Railways 50

Spoornet
103 Italian Railways 47
(South Africa)
Kazakhstan Korean National
Railways 100 Railroad 28

1 Product of total tonnes carried and kilometers traveled per tonne moved.
2 Product of total passengers carried and kilometers traveled per passenger trip.
3 Burlington Northern Santa Fe.
4 Includes 6 major operating companies.
5 Société Nationale des Chemins de Fer Français.
Source: International Union of Railways (UIC); International Railway Statistics
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G E T T I N G I N D I A’ S R A I LW AY S O N T R A C K 7

EXHIBIT 2

Connecting a nation

• Established in April 1854

• Largest employer in India, with a workforce of 1.6 million
• Carries more than 11 million passengers per day1
• Transports more than 1 million tonnes of freight per day1
Northern
• Covers a 62,000-kilometer route
• Spans 80,000 kilometers of track
• 20% (13,500 kilometers) of total route was converted to electric
track as of March 1997

Delhi Northeast
Frontier
Northeastern

Guwahati
Western Eastern

Central Calcutta
Southeastern
Mumbai

Secunderabad Length of route by railway zone, kilometers

Konkan
South Northern 11,007
Central
Northeastern 5,078
Northeast Frontier 3,816
Bangalore Western 10,023
Chennai
Eastern 4,228

Southern
Central 7,122
Southeastern 7,273
Konkan 760
South Central 7,138
Southern 7,040
1Asof 1996–97.
Source: Indian Railways; Allwonders.com (Mapsofindia.com); McKinsey analysis

common mode of long-distance transport, running almost everywhere,

including some of the country’s poorest and most remote regions (Exhibit 2).
The Indian Railways workforce of 1.6 million makes it the largest employer
in India. But while the country’s gross domestic product is growing by 5 to
7 percent a year, Indian Railways is growing by only 3 percent. Worker pro-
ductivity (measured by traffic units per employee) is lower than that of the
railway systems of several other South Asian countries and even of China’s
railway system, which has 3.3 million employees. The financial statements
of Indian Railways, recast in a corporate format, show large losses.

A McKinsey study of the world’s rail systems found that India’s predicament
today is comparable to Europe’s 15 years ago. Indian Railways, like its Euro-
pean counterparts then, has suffered a sharp decline in market share in both
freight and passenger segments. Its freight share, which was more than
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8 T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 4 : A S I A R E VA L U E D

80 percent in the 1950s, has declined to 40 percent. With more and more
expressways and four-lane highways likely to be built over the coming
decade, that share will probably decline to 25 percent. A rapid increase in
short-distance bus transportation and car travel, in addition to airline deregu-
lation, has resulted in a similar decline in passenger share.

Indian Railways does not clearly distinguish between its public-service obli-
gations and commercial objectives. Because the railway system receives
blanket subsidies, the government finds it difficult to gauge who benefits
from the subsidies and how much. Blanket subsidies also have a corrosive
influence on performance, and the absence of transparency leads to a lack
of accountability. Experience from around the world indicates that the sepa-
ration of public-service obligations from commercial imperatives is critical,
so most of the world’s biggest railways have already taken steps to achieve
this: gaining some degree of independence from the government, focusing
intensively on the customer, and divesting noncore businesses. India’s rail-
road must also take this path.

First, to gain some independence, Indian Railways should be designated

as an autonomous entity, separate from the government. Autonomy could
mean anything from becoming more like a corporation to being fully priva-
tized. A corporate approach would help create greater transparency and
accountability.

Second, Indian Railways needs to focus on customers. Freight should be

separated from passengers, who can be subdivided into long-distance and
commuter groups. While this may be obvious enough to modern private-
sector marketers, it is a considerable leap for a government organization
such as Indian Railways. But with economic liberalization bringing the private
sector into core infrastructure arenas, such marketing becomes vital for
cost-effective transportation. An example from the steel industry demon-
strates the problem: Indian steelmakers have become increasingly competi-
tive in the world market, but high freight charges have raised the cost of steel
so much that Indian buyers prefer to import it rather than buy it from domes-
tic producers such as SAIL (the Steel Authority of India) or TISCO (Tata Iron
and Steel Company).

Finally, Indian Railways must separate tangential areas, such as manufactur-

ing and catering, from its core business of providing logistics service for
freight customers and passenger service. India has the world’s most verti-
cally integrated rail system. Even China, which started its reforms in 1992,
is separating activities such as the manufacture of rolling stock.

Is privatization the answer for Indian Railways? International examples do

not provide a clear answer. Railways in Japan and Britain are privatized, and
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G E T T I N G I N D I A’ S R A I LW AY S O N T R A C K 9

both have been successful in some respects and unsuccessful in others.

The conclusion is that the answer on privatization can wait. Far more impor-
tant is a restructuring along the lines described here. Once that is achieved,
Indian Railways can consider a broader restructuring and continue its trans-
formation into a powerful engine of strategic, economic, and social value for
the country.

—Christoph Wolff

Christoph Wolff is a principal in McKinsey’s Vienna office. Copyright © 2000

McKinsey & Company. All rights reserved.