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Do you need a reservation for traveling in Trains in India?

Reservation is needed for traveling in trains in India, you need a seat or berth reservation for any long-distance journey on an Indian train; you cannot simply turn up and hop on. Bookings open 60 days in advance (although it was recently temporarily extended to 90 days as an experiment). Some short-distance inter-city trains may open for bookings less than this).

Indeed, according to an Indian professor with whom I shared a compartment, computerisation saved him 50% of his travel costs as he had always had to pay the same again in bribes to get a reservation..! Indian trains are usually very busy, and they often get booked out days or even weeks ahead. You should make reservations as far in advance as possible - you may see TV screens in the reservation offices in major cities showing berth availability on the main trains from that city over the next few weeks. However, a tourist quota gives foreigners and IndRail passholders preferential treatment.

Indian Railways have a unique reservation system:

After a train becomes fully booked, a set number of places in each class are sold as 'Reservation against Cancellation' or 'RAC'. After all RAC places have been allocated, further prospective passengers are waitlisted. When passengers cancel, people on the RAC list are promoted to places on the train, and waitlisted passengers are promoted to RAC.

Tourist reservation bureaux:

The main stations in big cities and tourist centres such as New Delhi, Bombay, Calcutta, Agra, Jaipur and Varanasi have an International Tourist Bureau where foreign travellers can book trains away from the crowds and queues at the normal booking office. There is also a 24-hour rail booking office at Delhi International Airport. For a list of stations with an International Tourist Bureau, and opening times, visit indianrail.gov.in and select 'Information' then 'International Tourist'. Ignore anyone telling you the ticket reservations office is closed, but their travel agency across the street can sell you a ticket..!

Tourist quota in Indian Railways:

Many important trains (but not all trains) have a special quota of seats or berths available for tourists and IndRail passholders. A train which is fully booked for Indian travellers may still have a few 'tourist quota' berths available within a day or two of departure so that foreign travellers can travel at short notice.
However, even using this special quota you may have to wait a day or so before there is a berth available to your chosen destination. The tourist quota applies to perhaps 200 trains a day out of a total of 9,000 trains, and the quota might be just 2 and seldom more than 12 places, spread over each class. Railway Tickets issued against the tourist quota must be paid for in US Dollars, pounds sterling, or rupees backed by an exchange certificate proving they have been obtained from a bank or bureau de change in exchange for foreign currency. Rupees backed by an ATM receipt and foreign bank card may be sufficient.