RTT, have a look at what I have said in another reply above.
What you and many others have to understand is that there was a designed and planned project that was instigated by the Askin government following many industrial problems across the state in many areas. The late 60's had unprecedented upturn in traffic which brought out knives from media and rural groups as they could not get their business onto rail, and it was from long term users as well, and not just petty little groups either.
The steps were taken by him to rid the headship of the NSWGR and appoint someone to rationalise the system, words used was modernise it, something that has gone on for yonks since. His wonderful appointment of Beechings hatchet mand Shirley was the result, same with his agenda that was set, withdraw steel carriages and get money to the government through scrap value, withdraw 4 wheel rolling stock, which was overdue but like the 60's restrictions on no new locomotive orders for withdrawn steam, it created huge problems.
For many it is hard to fathom and reasonings behind it, but believe me there was much to what went on, that people find hard to believe, but truth is more often than not stranger than fiction. Few railwaymen of the time worked against the system few hated the actual job but it got to the point where a lot of dedicated people in many grades just had enough and as soon as they could retire with the super or the old 10 a penny scheme they did so.
Reality is that the traffic that was turned away turned the system into one that had made operating surpluses from freight revenue was changed into one that became a loss maker across all fields and divisions, when Askin was hit with the breach of the Railway in the late 60's, IIRC it was the 67/68 annual report, when the railways made and overall profit after tax, he was like a raging bull. the profit was not high but any profit made was supposed to go back into the system for the payment of expenses and maintenance, among other things.
I've read that post and many similar ones in the past by yourself on same topic.
I do not share your conspiracy theory because it doesn't stack up against national and global trends which were very similar.
While some of this maybe true, the reality is what happened was likely going to happen anyway. As I said look at Qld, they held onto their Lander's and local goods on some lines right up to 2010. This so called freight was northing more than local retail type which the railways used to carry and used to carry at a loss. As you said yourself, the local tables councils wanted to use rail for their freight, but for what? Culvets, gravel??? Even fuel across therail whole country is just about gone apart from 1-2 services. Livestock is carted in Qld, but only on very long runs and last I read about 15 years ago required as 80% subsidy, hence the cut backs.
Hence I strongly suspect the freight that was being pushed off rail or rejected was the goods that isn't carried today almost anywhere apart from maybe cross country long haul.
if we look at low labour cost India, a country over 2000km x 3000km, plenty of population, heavy rail density. Indian Railways doesn't even carry goods carried in Australia because they cannot make money out of it. They won't touch anything less than rake load and carted significant distance. This was the basis for ANR moderisation in the 70/80's to Tasrail, SA and other parts of their Network. QR and others since followed.
Remember when the Feds wanted the states to hand over all their freight and regional, but most refused because of the fear of loss of regional services and branch lines. It all eventually happened anyway.
BAck to the Tablelands. Arimdale rail head, local councils have pushed for turning it into a rail hub, after 20+ years nothing. because there is minimal viable freight on offer.