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About a year ago, Manmohan Singh recounted a conversation that he had had with his railway minister, Lalu Prasad. “Laluji,” the Prime Minister recalled saying. “You should think of how to give India a modern railway system that the country can be proud of.” He did not elaborate on Laluji’s response, but at the time it sounded a somewhat ludicrous kind of conversation to have had.

Here was Lalu Prasad, erstwhile chief minister of the benighted state of Bihar, known to one and all as the man who was great for buffooning in front of TV cameras but who had destroyed what little passed for Bihar’s administration before he was forced out of office on a corruption charge, and who had then stunned his detractors into speechlessness by making his unlettered wife his successor. How could such a man even know what a modern railway system should be?

Well, surprise! Lalu Prasad may be the best thing to have happened to the railways in the past quarter century. That is how much time has passed since M.S. Gujral, as chairman of the railway board, put in place the work processes and systems that saw the railways achieve dramatic gains in productivity in the early 1980s, before it again subsided into a typical public sector rut.

The railway budget that Lalu Prasad has unveiled on Friday bears testimony to the dramatic productivity gains achieved in the financial year that is drawing to a close. And it bears testimony to how thinking along new and different lines can change the dynamics of even an old, large and capital-starved organisation like the railways.

Faced with competition from the new budget airlines, Lalu has done the unthinkable: slashed rail fares for air-conditioned travel. He has introduced volume discounts for those who offer additional freight, and even larger discounts for off-peak traffic. He has speeded up trains, and unveiled the most ambitious investment programme that the railways have seen in years - including new, fast-track corridors. All this is built on a year of solid budgetary surpluses, achieved by exceeding traffic targets.

The elbow room for pricing and other initiatives has come from recognition of a simple fact: the bulk of railway costs are fixed costs. If you can improve productivity, the average cost of haulage drops significantly and you can then offer discounts to wean traffic back from road and air. It does not take genius to work this out, but no previous railway minister had understood this somewhat obvious message. All it took was Lalu’s common sense, and a willingess to let his officials do the rest.

The whiff of change has been in the air. The railway budget a year ago had introduced flexible pricing of rail services. Then came the decision to increase the loading limit per wagon, presumably within the limits imposed by safety and the wear and tear of track and rolling stock.

Last month saw the bold decision to allow private containers on railway lines - in effect, private freight trains. And now come more ambitious moves to wean back traffic that the railways have lost over the years to other modes of transport, largely because of the railways’ own fault. More traffic has meant more profits, which have now translated into more investment. If ever there was a virtuous circle, this is it.

This great surprise package comes with two simple but important messages. First, reform need not come from only Harvard-educated lawyers like the finance minister; homegrown politicians are capable of doing what it takes if they see that this is what will win them kudos. What every railway minister has dreaded over the years is his officials telling him that passenger fares have to be raised because these lose money. Lalu has created the financial cushion to be able to slash fares - and the millions who travel on the railway network every day will cheer him.

Second, even mammoth public sector enterprises can be made dynamic and market-oriented in double-quick time, if their top managements are pointed in the right direction. So, who knows, India may in a few years actually have a rail system that the country can be proud of!

TN Ninan is the editor and publisher of Business Standard, one of India’s leading business newspapers. An award-winning journalist and a member of various boards and professional bodies, he is a familiar figure on Indian national television as a commentator on economic issues. His weekly column, devoted to analysis of the Indian economy and business environment, now appears on FT.com every Tuesday. Visit the Business Standard website at http://www.business-standard.com

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