Read this article to learn about the history of railway development in India.

History of Railway Development # The Old Guarantee System (1844-69):

The railway construction received “the first decisive stimulus” during Dalhousie’s administration.

When Lord Dalhousie anchored in India in 1847, he recommended the policy of constructing trunk lines connecting the interior of each of the three Presidencies instead of the previous policy of constructing experimental lines.

He also recommended that railway construction should be entrusted to private companies “under the supervision and control of the Government”. He flatly rejected the idea of Government constructing the railways.


Accordingly, two contracts were made—one with the East India Railway Company in 1849 to open an experimental line from Calcutta to Rajmahal, with a branch going to Ranigunj, and another with the Great India Peninsular Company in the same year. As a result of these contracts, the first passenger train ran between Bombay and Thane in April, 1853 and the second one from Howrah to Panduah in July 1854.

Several arguments were advanced in favour of the construction of railway lines by the joint stock companies incorporated in England. Firstly, pressure from Lancashire manufacturing interests who argued that a larger supply of clean raw cotton could be drawn from India so that the English cotton industry could flourish.

This could be strengthened by the development of a railway network and railways were to be floated on a commercial basis. As the operation of a commercial undertaking did not fall within the proper functions of the government, railways were to be built by private companies. Secondly, the habit of dependence of people on government for anything smacked of a bad practice of Indian people.

To discourage this tendency, railway construction should be thrown open to English merchants. Of course, at that time private companies showed indubitable credibility in the supply of huge capital. In accordance with Dalhousie’s plan, contracts were made with eight companies for the construction and management of 5,000 miles of railway line between 1854 and 1860 under terms that came to be known as the Old Guarantee System (OGS).


The system intended to assure a minimum rate of return on the capital to be invested. It was in the form of a system of subsidies. British investors promptly responded and put their capital to the private railway companies — this was indeed a veritable bonanza for British business.

Features of the OGS:

(i) Free gift of land by the State to the private companies on a lease for 99 years;

(ii) Guaranteed interest at rates varying between 5 p.c. and 4.5 p.c. on the capital outlay payable at the fixed rate of exchange of 22 pence per rupee for a period of 99 years on the capital raised by the companies;


(iii) Surplus profits over this 5 p.c., if any, were to be shared equally with the Government;

(iv) Reservation of powers of supervision and control of the construction and the working of the railways including rates and fares by the Government;

(v) Reservation of the right of purchase of lines after 25 years by the State;

(vi) Surrender of the railroads at 6 months’ notice by the companies and get back the actual capital spent by them, if they wished.

These extremely favourable terms of contract, made for a period of 25 years (1844-69), came to be known as the OGS of railway construction. Because of the indulgence made in the contracts, there had been voluminous export of British capital to India for investment in railways. Not only this, railway equipment supplied by the British firms also flowed to India considerably.


Although assistance in the form of a system of subsidies known as the ‘guarantee’ might be partially justified for Indian railway construction, the OGS, in the ultimate analysis, was found to be unnecessary and wasteful. It was agreed by the architect of the system that capital would not be forthcoming to India for railway construction without a guaranteed interest.

Against this premise, critics like William Thornton and Macpherson argued that even unguaranteed capital would have gone into India since England at that time was desperately seeking the outlet of surplus capital. Thus, the OGS yearned at ‘promoting personal interest at public expenses.’

It was wasteful as the system led to reckless expenditure. The railway companies have no inducement to curtail expenditure in view of the ‘guarantee clause’. Private railway companies invested huge capital than was economically and scientifically justified. Further, assuming indispensability of the guaranteed income, it need not have been quoted so high since the prospect of getting money at 3 p.c. guarantee was readily available at that time.

The minimum yield guaranteed (4.5 p.c to 5 p.c.) was in excess of prevailing rates in London money market. Prof. N. Sanyal rightly says that “the Indian guarantee killed effort for economy, promoted recklessness, and involved the country in liabilities much beyond what the people could bear”.

In all, 4,255 miles of line had been opened by 1869, with a capital outlay of Rs. 89 crore. One ‘result of the wasteful expenditure was that, instead of estimated cost of construction of £ 8,000 per mile, it actually shot up to £18,000 per mile—without counting dividends advanced upon the guarantee and the cost of land which was given free. A variety of factors were responsible for such high cost.

These were: pioneering nature of the work, lack of skilled labour, lack of experience, high but unnecessary standard of construction, etc. However, the principal factor that led to the high cost of construction was the system of excessive guarantees which left no positive encouragement to the companies to economise in construction or in operation.

Wasteful construction of railway lines actually brought down companies actual rates of return and unnecessarily increased the subsidy and mulcts the State of millions of rupees. Many of the unprofitable lines constructed by the companies survived mainly out of the ‘guarantee clause’.

The guaranteed interest on the capital invested in railways, which India had to pay in sterling, stood at 13.5 million pounds by 1868. Thus, the OGS imposed an enormous financial burden on the State as well as the taxpayer. Deficit on the railway budget rose to a staggering figure of Rs. 166.5 lakh by 1869. It was said that the entire profit went to the guaranteed companies and the whole loss to the Government.

Following M. Dobb, we can conclude that railway construction indeed served for Britain and not India “the double function of providing a profitable outlet for capital and stimulating the export of British capital goods”. Thus, the guarantee contributed substantially to the ‘drain’ of funds from the sub-continent.

Unfortunately, the foreign ruler did not show any amount of interest to build up any of the allied industries in India required to supply the materials demanded by the railways. Obviously, this then demanded imports of the materials from foreign countries, mainly Britain. In other words, the OGS failed to give any forward thrust to industries allied to railways.

History of Railway Development # State Construction and Management (1869-82):

In view of the extravagance and mismanagement of the private companies, absence of effective control in the working of the companies, the remote possibilities of sharing the profits and highly unsatisfactory financial results, it was decided to follow a policy of direct government construction of railways. So far as the OGS was concerned, the entire profits, went to the foreign companies while the entire loss to the Government.

The then Viceroy, Governor General Lord Lawrence, in 1867 and, again, in 1869, argued that the Government of India could raise capital in the British market at a cheaper rate (e.g., not more than 4 p.c.) and undertake the cheaper methods of construction of railways under its own supervision.

This proposal was sanctioned and the construction of State Railways was undertaken accordingly in 1870 with borrowed capital. Thus, in the history of Indian Railway, a new epoch started in 1870 as it was an era of laissez-faire. Wrongs committed in the earlier period have been now set right. The first ten years after 1869 witnessed construction of railway lines at a remarkable speed. The average cost of construction came down due to greater efficiency and economy in construction, particularly on the State lines.

The saving in costs during this period was due to the adoption of a new cheaper gauge, called the meter gauge, for nearly all lines. But the other evil of meter gauge line was nevertheless unimportant. The evil was the financial embarrassments. A comparison of financial results in 1880 showed that the average return on capital on company managed lines stood at 6.2 p.c. as against 2.15 p.c. on the State lines.

This was partly due to the fact that company lines were mainly located in the high profit areas and prosperous part in the country and State lines were spread across the country as the policy of the Government relating to railway construction was based on humanitarian and strategic considerations.

Some ‘famine lines’ were constructed and some lines were constructed for defending the frontiers and for the movement of military in controlling the mob. As a result, financial difficulties of the Government went to nadir more because of the fall in the exchange value of rupee, a rise in the costs of famine relief, and, a rise in defence costs on the North-West Frontier.

Moreover, the Famine Commission of 1880 opined that to tackle the menace of famine, construction of additional 5,000 miles of railways was to be undertaken on a war footing. Equally vociferous was the British merchants and industrialists as regards state construction and they, outcries for the rapid expansion of railways to encourage wheat exports from the remotest field of this country to England and the import of iron rails and other supplies to India.

History of Railway Development # The New Guarantee System (1882-1900):

Upset by resource crunch and the strong desire of the Famine Commission to construct railway lines as speedy as possible to mitigate the problem of famines, the Government once .again returned to the policy of inviting private British companies to undertake railway construction.

Company management of ‘State’- owned lines was favoured and, when the Government purchased the ‘East Indian Railway’ in 1879 its management was left with the old company.

The Parliamentary Select Committee of 1884 recommended that, along with the private companies, the ‘State’ should come forward to construct railways. Thus, this arrangement —known as the New Guarantee System (NGS)— was based on a sort of partnership between the Government and the private railway companies. Under this system, fresh contracts were made by the Government with the private companies, but with terms more favourable to itself this time.

Features of the NGS:

The terms that were granted to the companies are known in the history of India’s railway construction as the ‘New Guarantee System’.

The chief differen­tiating features of the NGS were:

(i) Railway lines managed by private companies from the beginning were declared to be the property of the Secretary of State for India who reserved the right to terminate the contract after 25 years and/or at subsequent 10-year intervals on payment of the capital provided by the companies;

(ii) The interest guaranteed to the companies on their capital was pegged at a lower rate, usually 3.5 p.c.; and

(iii) The Government retained a much larger share of the surplus profits, usually three-fifths.

When the contracts of the old guarantee companies ran out, the Government acquired the railway lines; some of which were retained under direct State management and others were handed over again for management to the same companies under the NGS. However, the construction of railway lines had not altogether been given up by the State. The State continued to construct both protective and productive and self-supporting railways leaving only profitable lines to private companies.

OGS vs. NGS:

So far as the terms of contract were concerned under the old and the new system, the latter displayed better and more favourable terms to the State.

Firstly, under the NGS, the lines constructed by private railway companies, such as the Bengal Central Railway, the Bengal Nagpur Railway, the Southern Maratha Railway, etc., were from the beginning the property of the Secretary of State. But, under the OGS, the State exercised the power to purchase lines from the companies after 25 or 50 years. Railways would become the property of the State after the expiry of 99-year lease. Thus, the OGS failed to prevent over­-capitalisation in the railways.

Secondly, the guaranteed interest on the capital, contributed by the companies was lower (3.5 p.c.) under the NGS, while it was about 5 p.c. under the OGS. Thirdly, the division of surplus profit under the NGS was more favourable (usually ⅗ths) than under the OGS where surplus profits were to be shared on a 50-50 basis.

Fourthly, under the OGS, if the Government wished to buy off railway lines, the Government would have to pay compensation at the average market value of the companies’ shares in London for three years preceding. But the NGS provided for buying off shares at their face value only.

Finally, the old system was strictly rigid since all transactions were to be made at a fixed rate of exchange of 22 pence per rupee. The NGS was considered to be a better offer as to transfer some of the exchange risks to the private railway companies. But the NGS did not find favour at the hands of critics who pointed out that the above-said advantages were not only relatively minor but also were no compensation for the exclusion of the State in toto from the ‘productive’ lines. Under the new system, the State was asked to confine itself ‘merely to those railways which, from their unprofitable character, could not be undertaken by private enterprise.’

The construction of the profitable lines was handed over to the private companies, thereby sacrificing a great deal of revenue. Because of the guarantee clauses, the railway budget showed huge net deficit. The losses to the State during the first 40 years of Indian railways amounted to Rs. 58 crore under the guarantee clauses.

Further, the question of management was peculiar since railway policies were not framed by one but by two authorities, one in India and another in England. As a result, 96 different lines constructed by these two agencies were opened and administered by 33 railway administrations.

These 96 lines were classified into 10 groups on the basis of ownership and management thereby leading to occasional conflicts and friction. ‘The organization was far from satisfactory from the viewpoint of efficiency and economy.’

Achievements of the NGS:

Under the NGS, we saw for the first time the beginning of the Branch Line Companies which were offered more liberal terms than what it did under the new system. The first railway construction under the Branch Line terms was the South Bihar line in 1895.

Along with the branch line, construction of District Board lines was undertaken to provide some sort of relief to the finances of the Government, since railway lines catering to purely local needs were to be financed by District Boards of the security of their revenues.

The District Boards were empowered to levy special cess for railway purposes. The first of this kind was the District Board to Tanjore which constructed a short line from Mayavaram to Mutapet. However, the scheme did not arouse enough enthusiasm since the District Boards were starved of resources. As a result, only 158 miles of railway lines were constructed in Bengal and 105 miles in Tanjore district.

However, there had been a dramatic increase in rail lines during this railway era. During this period, construction of railway lines averaged 744 miles per year over 1882-1900 as against 468 miles of the previous period. The total mileage increased from 10,069 to 24,752 miles. Of this, about 14,000 miles were of broad gauge, 10,000 miles of metre gauge track, and the rest were Tight’ railways.

But expansion was still poor relative to other developed contemporary countries. In 1902, as compared to one mile of railway line for every 5 square miles in the UK, for every 17 square miles in the USA, and for every 29 square miles in Japan, India had one mile of railway line to every 63 square miles.

For the first time in the history of Indian railways, some net profits accrued to the State exchequer. Between 1900-1902, the net gain stood at about Rs. 1.75 crore. There were other gains too. Railways’ contribution towards the revenue to the Government increased from Rs. 75.7 crore to Rs. 1,108 crore between 1881-1901. Thus the railways earned more than what it spent.

History of Railway Development # Rapid Extension of Railways up to 1914:

With the advent of the 20th century, Indian railways entered a new era. Thanks to the thriving trade and commerce, India became equipped with huge railway network which made railways a “running concern”. But problems remained. Railway administration exhibited utter inconsistency since railway lines were classified into at least 10 groups on the basis of ownership and management. Further, the speed of movement of freight and passenger trains was not only slow but also accident-prone. The railway stock was not adapted to the country’s requirements.

The Government, therefore, appointed Thomas Robertson in 1902, to enquire into the working and administration of the Indian railways. Apart from recommendations on technical matters, he recommended company management of all railway lines in the country. But, Indian public opinion as well as the Government was against company management.

As a result, the ‘dual’ system— ‘State’ and ‘company-managed’ lines—continued throughout this period. Following the proposal made by T. Robertson, the Railway Board was set up in 1905 to draw up the programme of expenditure on railway development. In 1908, the status of the Railway Board was enhanced and from that date Railway Department was made independent of the Ministry of Commerce and Industry.

Anyway, as railway expansion was found to be inadequate compared to the country’s requirements, British merchants led a deputation to the Secretary of State to allocate more funds for railway expansion. But Indian people took a U-turn and demanded more funds for irrigation and education rather than railways.

Actually, during this time, railways vs. irrigation debate ensued. Following this development, the Government appointed Mackay Committee in 1908 to investigate Railway Finance and Administration. The Mackay Committee recommended that since the country could profitably have even 100,000 miles of railways, a standard of £12.5 million annually be allocated for railway construction and development.

As a result, capital expenditure increased by Rs. 110 crore between 1908 and 1914 and the railway mileage rose to 34,656 miles in 1913-14 as against 24,752 miles in 1900. As the railways began to prove remunerative, gross earnings rose from Rs. 51 crore to Rs. 63 crore between 1910 and 1914-15.

Despite the phenomenal expansion of railway lines during this period, the overall achievement was far from satisfactory, particularly when compared with contemporary countries. Above all, the plight of third class passengers was miserable since they had to travel in cattle-trucks and goods wagons! Other amenities, like lavatories in coaches, drinking water, waiting rooms, etc., were conspicuously absent. This discourteous and unsympathetic attitude again brought to the fore the demand for State ownership and management of railways.

The following four major aspects emerge from the above historical development of Indian railways:

Firstly, no purely Indian company was formed for railway construction in India. Instead, guaranteed foreign private companies were allowed with adequate backing. In fact, for all practical purposes, Indian private companies with capital resources played a negligible part in the construction of Indian’ railways.

Secondly, despite being assured or guaranteed interest on capital, private foreign companies lacked initiative and enterprise since they were unwilling to face the normal hazards of enterprise. Companies were hesitant in undertaking ‘risks of loss’. These companies intended to be sheltered or protected.

Thirdly, the speed at which railways were built in India was really remarkable amidst difficulties of multifarious nature—resource crunch, plague, famines, etc. Even in England, railway development lagged behind India.

Finally, despite the guarantee clause, Indian railways failed to meet the interest charges on the capital invested in them until the close of the 19th century. Up to 1900, when Indian railways saw the ‘face’ of net profit, the Government had to shoulder the enormous burden of Rs. 76 crore on account of guaranteed interest.

History of Railway Development # The World War I: Breakdown of the Railway System (1914-21):

The World War I brought utter chaos and confusion, thereby exposing the weaknesses of the Indian railway system. During this time railways came under obligation to carry troops and stores. Capital expenditure had been drastically reduced from Rs. 18.4 crore in 1913-14 to Rs. 2.97 crore in 1916-17 mainly because of the exigencies of the war finance.

Financial strains came to such a pass that not only railway construction but also repair works had been suspended. Paucity of finance forced the authorities to dismantle 150 miles of track. During this time, defence considerations were so overwhelming that the needs of commercial traffic had been cold-storage. All this led to an appreciable decline in the standards of operational efficiency provided by the Indian railways. Over­crowding in passenger trains became so acute that people had to travel on footboards or on the roof of the wagons even for a long distance.

Some stop-gap measures were undertaken to halt this predicament. Railway authorities preferred to sacrifice passenger traffic (by withdrawing fare concessions, introducing various traffic restrictions, etc.) in favour of the goods movement. Another notable development of this period was the increase in railway rates and fares.

The great inconvenience to mainly passenger traffic and also goods traffic on the one side and the high fares and freights on the other made the public hostile against the anti-national policy pursued by the British railway companies. The Indian Legislative Assembly also raised its voice. The criticism gathered momentum with the uncovering of a number of cases where the English dominated companies had entered into secret agreements and acted against national interest.

Vigorous demands were made by the Indian public and trading community for the adoption of the State management of railways immediately. To flatter the Indians, the government obliged them by appointing the Indian Railway Committee in 1920 under the chairmanship of Sir William Acworth.

History of Railway Development # The Acworth Committee—Separation of Railway Finance (1921-30):

After the termination of the First World War (1918), the Indian public opinion strongly voted for State management. Consequently, the Indian Railway Committee was appointed in 1920 headed by Sir William Acworth—a railway expert in England.

It was appointed to examine in detail:

(i) The advantages of alternative methods of management of State-owned railways,

(ii) The organisation of the Railway Board and the extent of the Government control over the railway administration, and

(iii) The future policy of railway finance.

As regards the first of these, the Committee strongly and unanimously recommended that the “Indian railways should be managed not from London, but from India”. But as regards management of the Indian railways, the Committee was a divided one. The Majority Report favoured State management, while the Minority Report recommended the continuance of management by English domiciled companies.

The majority pointed out that the system of divided responsibility had acted as a drag on the efficiency of railways. But the minority expressed the view that the management of railways should be entrusted to private companies because of the shortage of funds of the Government, the danger of interference from the elected legislatures, and, above all, rigidity in State management.

However, the advantages of direct State management outweighed disadvantages as the majority members of the Committee believed. The Committee argued that direct State management as liked by Indians would enthuse them and might excite them to subscribe to railway loans.

Furthermore, the fruits of shares of profits could be reaped more favorably under State management since profits would accrue to the State rather than private companies. Moreover, national interests would be served in a better way under State management than under company management.

Regarding the second term of reference, the Committee recommended changes in the constitution and status of the Railway Board. The Committee also suggested the setting up of the Central and Local Advisory Councils. It recommended the establishment of a department of communications and Railway Rates Tribunal to determine fares and freights.

The most far-reaching recommendation of the Committee was about railway finance. Under the prevalent system, railway finances were included in the general finances of the Government. This kind of dovetailing of finances kept the railways at the mercy of general revenue position of the Government. In times of financial stringency, replacement, extension, and betterment of railways had been curtailed while, at the time of prosperity the surplus had been transferred to the Government.

The Acworth Committee strongly urged the separation of railway finance from general finance instead of being included in the Government of India’s general budget. In view of the turnover, the mixing of railway finance with the general finance was also an embarrassment to the annual general budget in as much as the extreme variability of railway profits might jeopardies the general budget. If these two finances were divorced, an atmosphere of certainty would prevail in both the general and the railway budget estimates.

The Government accepted almost all the recommendations forwarded by the Acworth Committee. A number of railway lines were brought under State management on the expiry of their contracts. The Railway Finance Committee was appointed to explore the possibilities of separation of railway finance.

Railway finance was separated from the general finance in September 1924 following the adoption of the Railways Separation Convention before the Indian Legislative Assembly. The ‘Convention’ laid down the amount of annual contribution to the General Exchequer that the railways should make.

Contribution would be determined in accordance with the capital outlay and profits earned by the railway system. The ‘Convention’ also stipulated that, if the amount available for transfer to the railway reserve exceeded Rs. 3 crore, one-third of that excess would go to the Central Exchequer. The first separate railway budget was presented in 1925.

The period saw a remarkable expansion in railway activities. The total route mileage increased from 38,039 to 41,724 in 1929-30, passengers carried to 634 million, and freight to 91 million tons. Electrification in Bombay and Madras suburban trains were also introduced during this period.

Between 1924-25 and 1928-29, the average annual contribution of railways to the general revenue stood at Rs. 6 crore while net revenues exceeded the interest charges each year by about Rs. 10 crore, thereby leaving a stamp of financial prosperity by the railways.

History of Railway Development # The Great Depression and after (1929-39):

The Great Depression dealt a body blow to India’s agricultural economy. Under its brutal impact, exports of agricultural raw materials showed; a remarkable decline and, consequently, railway traffic plummeted down. The freight carried by railways declined from 91 million tons in 1928-29 to 71 million tons and passenger traffic from 634 million to 480 million in 1932-33.

Competition from road transport did another havoc to the Indian railways. It resulted in a loss of Rs. 4.25 crore every year. The concomitant result of all these was the complete reversal of the railway surpluses of the previous three decades. To stem the rot, a perverse policy of raising rates and fares was tried in 1930, 1932, and 1936. What was needed at that time was the economy in expenditure.

Accordingly/ the Government appointed two committees—one in 1931 and another in 1932—to suggest measures how to achieve the economy of expenditure. Unfortunately, austerity drive on the part of the railway authorities was made at the expense of maintenance and renewal expenditures. However, the railways turned the corner around 1936-37 as soon as depressionary conditions were over. But earnings were not large enough.

The financial mess that the Indian railways exhibited during the 1930s again excited Indian people to raise their voices. The issue was discussed on the floor of the Indian Legislative Assembly in 1936 under the Chairmanship of Sir Ralph Wedgewood—another railway expert.

The Committee was asked to examine the financial position of the state-owned railways and to suggest measures for improvement in railway earnings. The Committee submitted its report in 1937 and urged the Government for building up of ‘depreciation fund’ of at least Rs. 30 crore and ‘equalisation fund’ for the interest and amortization payments.

For the time being, railways’ contributions to general revenues should remain suspended was another recommendation of the Committee. However, all the provinces criticised heavily this recommendation of the Committee and demanded the existing arrangement of railways’ contribution to general finances to remain untouched, even if this implied a deterioration in the standards of maintenance of the railways.

With a view to protecting railways against road competition, the Committee recommended a system of route licensing, freights and fare fixation, participation by railways in road transport, regulation of road transport, etc. However, success was little in these directions.

History of Railway Development # From World War II to Partition (1939-1947):

Railways were yet to come out from the morass of the Great Depression when the stage was set for the Second World War in 1939. However, there was an abnormal increase in railway traffic due to the movement of troops, passengers and goods as well as the growth of industrial production.

Works relating to maintenance and renewals except the most essential were shelved due to the exigencies of the war. In addition, track, rolling stock and other supplies had to be bodily removed for use in the Middle East theatres of war. All these led to severe strain on the railways.

However, the period was marked by financial prosperity. Gross earnings rose from Rs. 94 crore in 1938-39 to Rs. 226 crore in 1945-46. Railways’ contribution to the general revenues came to Rs. 158 crore and the railway Reserve Fund increased by Rs. 76 crore over the same period.

The partition of the country in 1947 had a disastrous effect on railways. About 6,950 miles or 19 p.c. of the track and corresponding equipment’s went to Pakistan, leaving 33,985 miles in India. One result of the partition was the emergence of Bombay as the principal port of supply for the western region of the country, as Karachi went to Pakistan.

Following partition, another dislocation took place in Eastern India. Because of the partition of Bengal, one had to reach Assam only by crossing Pakistan’s territory since railroad of Assam went to Pakistan. This problem was solved by constructing 149 miles long Assam Link in 1949. On the eve of India’s Five Year Plans, Indian railways were in utter doldrums.