Guarantee System in Indian Railways

Originally, the Indian railways were operated by the private companies owned by the British businessmen. They were granted free land and given a guarantee of minimum returns on capital.

Guarantee System

These two companies entered into contract with East India Company for construction of two small railway lines near Calcutta and Bombay respectively. With this, the Indian Railways started its modest beginnings in 1853, when the first Railway train journeyed a distance of 22 miles from Bombay to Thana. Since the investors in England had strong interest railways in India; they wanted the British Parliament to create a Guarantee System.  In the Guarantee System, any company that constructed railways in India was guaranteed a certain rate of interest on its capital investment. This guarantee was to honored by the East India Company. The railways which were made on this arrangement were called Guaranteed Railways. The guarantee was for a return of 5% annually, and the right for the railway company to pull out of the venture and get compensation from the government at any time. In return, the companies needed to pay to the Government when they earned more than 5%, half the surplus every year. Further, the Government had right to control expenditure and operation and to purchase railways at the expiry of 25 year.

However, there were many issues with the guarantee system. Major issue was that since the investors were assured of 5% return, they had no motivation to improve economy of the railways. {Read this document for an insight in colonial legacy of Indian Railways}

Modification in Guarantee System

The first Railway Company was taken over by the government of India in 1925. Gradually, the other Railway companies were also taken over and in 1950; the railways from the princely states were also taken over by the Government of India. Thus, 1950 onwards, the Railways become a unified state enterprise.

State ownership of the Railways was not achieved in a year or two but it took many decades in the process. In 1869, it was John Lawrence, who recommended the development of Railway lines under the state and thus the development of Railways through government agencies started very early. But it was very slow and till 1891, the Government could add only 3297 miles.

In 1879, the first old guaranteed Railways was purchased (East Indian Railway). In later era, the Indian princely states, district boards and other local authorities also took part in the development of Railways. But it was till 1900, that the Railways never showed profit. From 1882 till 1900, the existing companies became reluctant to invest in Railways and provide additional capital to development. So, a new modified guarantee system was developed which worked from 1882 till 1924. Under this, the Government took over the works such as branch and feeder lines which were un-remunerative.

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