Reducing rail freight key to making inland container movement competitive

Increasing the modal share of rail from the current 18% to 25% will save India Rs.3,000-6,000 crore a year in logistics costs by 2025


The modal mix for container transport in India is heavily skewed in favour of roads due to high railway freight, lack of reliable scheduling of freight trains, and poor last-mile connectivity. Photo: Ramesh Pathania/Mint
The modal mix for container transport in India is heavily skewed in favour of roads due to high railway freight, lack of reliable scheduling of freight trains, and poor last-mile connectivity. Photo: Ramesh Pathania/Mint

Rationalization of rail freight charges to reflect the actual cost has emerged as the single biggest factor for facilitating a shift towards rail from roads as the government looks to raise the share of railways in the movement of containers, cut logistics costs and make industries competitive.

The modal mix for container transport in India is heavily skewed in favour of roads due to high railway freight, lack of reliable scheduling of freight trains, and poor last-mile connectivity. Congestion and priority to passenger trains adds to delays in rail freight transportation. Cross-subsidization between passenger and freight trains has made the railways unviable for most transportation routes. This results in a greater preference for roads, which is not the ideal mode of transportation for the long haul.

Increasing the modal share of rail from the current 18% to 25% will save India Rs.3,000-6,000 crore a year in logistics costs by 2025.

The modal shift from road to rail will also cut down crude imports by 1.2 million kilo litres a year, saving another Rs.2,400-5,200 crore in fuel imports.

Exporting a container from the hinterland in India takes on average 32 days, compared with 26 days for China, for the same distance, according to a study undertaken by the shipping ministry. The transit time also varies by up to five days, forcing exporters to keep a higher buffer time.

Indian containers can take around 50% longer than Chinese containers for a similar inland distance. The duration is highly variable due to the lack of automation in customs processes, lower speed of trucks and trains, and congestion and inefficiency at ports. This unreliability of transport schedules forces shippers to build buffer time into the transportation schedule, leading to idle waiting time for export cargo at ports.

The ministry study reveals that on a per tonne km basis, the cost differential between India and China is not significant. China, however, has a lower overall container exporting cost due to lower lead distances. The study finds two opportunities to reduce export costs by Rs.1,100 per container. At a projected 25 million twenty-foot equivalent unit (TEU) volume under the business-as-usual scenario, it will save India Rs.3,000-6,000 crore a year by 2025. A TEU is the standard size of a container and a common measure of capacity in the container business.

Export-import container movement, including empties, was 10.7 million TEUs during 2014-15. Of the 9.3 million TEUs laden container volume, 60% was west-bound and the remaining 40% east-bound. China and the US accounted for approximately 14% and 10%, respectively, of the EXIM container volumes to and from India, while the remaining was split between several countries, including the United Arab Emirates (UAE), United Kingdom, Germany, Saudi Arabia, Korea, Vietnam and others.

In terms of the overall balance of trade in containers, India exported 5.1 million TEUs while it imported 4.2 million TEUs during 2014-15.

Three major hinterlands in India—the northwest, west and southern clusters—account for roughly 90% of container volumes.

The northwest cluster is the farthest from the coastline and is the largest, generating 3.7 million TEUs in 2014-15. It has the greatest impact on the overall logistics cost of container movement. It lies at an average distance of 1,087km from the Gujarat/Jawaharlal Nehru Port cluster.

The Gujarat-Maharashtra port cluster comprising Mundra, Kandla, Pipavav and Jawaharlal Nehru Port handles 70% of India’s EXIM traffic, while Chennai handles another 14%. Other ports on the east coast—Haldia, Vizag and Tuticorin—account for the remaining container traffic. Around 78% of the container traffic from the east coast ports is trans-shipped through Colombo, Singapore and Jebel Ali.

Mundra and Pipavav are the only ports whose primary hinterland (cargo catchment area) lies outside the state where they are located. Also, a significant portion of the total traffic from the hinterlands of the national capital region (NCR) and Punjab is handled at Jawaharlal Nehru Port even though they are closer to the Gujarat port cluster.

With respect to the modal mix for container movement from the hinterland to the ports, roads have an 82% share while rail accounts for just 18%.

The average distance between manufacturing hinterlands and ports in India is 700-800 km compared with 150-300 km in China. Even though India fares better than China in the transportation cost for a comparable distance, longer hinterland to port distance leads to higher costs for exporting/importing a container in India as compared to China.

Higher rail haulage charges due to cross-subsidization (unlike in China) make exports/imports expensive in India.

Due to the freight charges on road and rail and handling cost involved, rail in India is currently viable for exporters-importers only for a transportation distance beyond 1,000-1,300km. This makes the northwest cluster the primary hinterland where rail becomes viable for inland container transportation. But the cost differential between road and rail remains minimal even beyond a distance of 1,000-1,300 km. Due to this, only 38% of the total volume from this cluster moves by rail.

Assuming a scenario where Indian Railways charge only the cost incurred to transport containers without any mark-up, the viable distance for exporters-importers to use rail reduces to 600-700km. This implies many routes from the north-western hinterland to the ports will not shift from road to rail because of the economics involved.

Rationalizing rail rates for containers can reduce the cut-off distance for the viability of rail from 1,000-1,300km to 400-500km. This will enable changing the modal mix from road to rail, especially for the northwestern hinterland to increase trade competitiveness, de-congest roads and port gates, the study concluded.

The question now is whether the railway minister Suresh Prabhu is willing to take on this challenge.

P. Manoj looks at trends in the shipping industry.

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