In 5 charts: railways poor finances & how to fix it

2021-01-30 04:57:16

Railway Budget 2021: Like every year, Indian Railways operating ratio will be an important parameter to track in Finance Minister Nirmala Sitharaman’s Union Budget 2021. In simple words, the operating ratio tells us the amount Indian Railways has to spend to earn every rupee. So, if railways has to spend 90 paisa to earn Re 1 revenue, then the operating ratio is 90%. But, why is operating ratio important? We look at the significance of this indicator, why it has worsened in the last few years, the likely impact of COVID-19 on railways’ finances and the policy prescriptions for a financially healthier railways.
Operating ratio is a key indicator of an organisation’s financial health and the higher it is, the more strained the finances. The national transporter’s operating ratio has been deteriorating for some years now, with the last few years consistently seeing a figure above 95%. Indian Railways reported its worst operating ratio in 10 years at 98.44% in 2017-18.

Operating ratio: The cause for deterioration
The rapid rise is evident from 2016-17 when the operating ratio hit 96.5% as against 90.48% in 2015-16. According to the government’s Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement 2019-20, operating expenses and pension payments have soared in the last few years.
In 2008-09, the operating ratio was 75.9% due to buoyancy in the national economy getting reflected in railway traffic. However, since the implementation of the 6th and 7th Central Pay Commission the working expenses have ballooned. The momentum in earnings growth has also not sustained, the statement noted. This has resulted in the operating ratio steadily rising in the last few years.

The narrowing gap between the Gross Traffic Receipts and Working Expenses is evident from the graph above, thereby reflecting in the poor operating ratio.
Window-dressing finances?
After clocking its worst ever operating ratio in 10 years, railways declared a marginally lower figure of 97.29% for 2018-19. However, the Comptroller and Auditor General (CAG) of India in its report tabled last year stated that the national transporter “window-dressed” finances. “If the advance freight of Rs 8,351 crore (pertaining to 2019-20) from NTPC and CONCOR was not included in the earnings of 2018-19, the operating ratio would have been 101.77% instead of 97.29%,” the report said.
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CAG recommended that the Ministry of Railways should look to diversify its freight basket and take steps to augment internal revenues.
COVID-hit railways
Budget 2021 is being presented at a time when the Indian economy is in technical recession, with two quarters of contraction due to COVID-19. Indian Railways has suffered huge passenger revenue loss due to regular train operations being shut. The revenue from passenger fares may see a massive 72% year-on-year slump in FY21, VK Yadav, the then Railway Board Chairman said in December. A 72% decline would imply passenger revenue of just over Rs 15,000 crore for railways. However, Yadav expressed confidence that freight revenue figures would surpass FY20 tally. The Economic Survey 2020-21 has also noted the railway freight traffic has not just recovered but surpassed the previous year’s levels in the third quarter. Rail freight loading saw a 8.5% increase in December as compared to the same month in 2019.

The impact of COVID-19 on the railways’ operating ratio target of 96.2% will only be known on February 1. Importantly, working expenses with regards to salaries and pensions form a huge chunk of the overall working expenses.

With several thousand coaches sitting idle in depots, the maintenance cost may have gone up, but the fuel cost of running trains and associated maintenance with every run would have come down. Passenger revenues have fallen drastically, but it’s a loss making segment for railways. Freight revenue has also not grown as per the Budgeted projections. The net impact on operating ratio is hence difficult to ascertain.
The road ahead
For the long-term, experts advocate focusing on growing freight and passenger revenues since a substantial portion of working expenses are fixed. In this regard, the opening of dedicated freight corridors and running of private passenger trains may help railways grow their revenue receipts at a higher rate. The Economic Survey also highlights the National Rail Plan’s objective to strategize a significant modal shift to rail. “The objective is to increase the modal share of rail in freight from the current level of 27% to 45%,” the Survey notes.
Freight revenue has grown 47.1% from Rs 91570.9 crore in FY14 to Rs 1,34,733 crore in FY20. Passenger revenue has risen 53.2% from Rs 36,532.2 crore to Rs 56,000 crore over the same time period. According to India Brand Equity Foundation’s report on railways, the revenue from passenger segment has increased at a Compound Annual Growth Rate (CAGR) of 6.43% from FY08 to FY19. Freight revenue has increased at a CAGR of 4.03% over the same time period.

Shri Prakash, Former Railway Board Member (Traffic) is of the view that Indian Railways would do well to focus on catering to high demand routes and commodities for passenger and freight segments. On the passenger front, there is high demand for overnight travel and that can easily be met, he told TOI.
Mukesh Rathore, Retired Director (Technical) of RITES has listed four priority areas for improving the operating ratio. “Firstly, expedite ongoing organisational reforms, secondly enhance staff productivity and efficiency,” he said. “Digitisation, automation and induction of world-class technologies in Indian Railways processes & systems and more professional selection & management of projects to minimise cost and time overruns will enable railways to reap their intended benefits sooner,” he said.
For freight customers, multi-modal approach will help railways earn better revenue – the promise of end-to-end connectivity and delivery via tie-ups with ports and inland waterways will be a game changer, believes Parvesh Minocha, Group Managing Director at Feedback Infra. “Indian Railways should focus on corporatising its structure, monetising and PPP so that the revenue earned can be invested back in improving passenger trains and introducing world-class products such as Vande Bharat,” he told TOI.
According to Shri Prakash, a healthy operating ratio for Indian Railways would be in the range of 80s. “For that to happen the working expenses should increase on an average of 8% assuming a 5% inflation rate. The revenue should grow at 12-15%, only then the operating ratio will come down in the range of 80s,” he said.

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