Financial Problems of Indian Railways

Indian Railways faces chronic financial problems. The annual rate of increase in cost has overtaken that of revenues during the last few years. There are several reasons of deterioration of the financial health of the Railways. These include, a high operating ratio, cross subsidization, social service obligations, salaries not a function of commercial viability and competition with roads.

Operating Ratio

The financial health of the railways is determined by its Operating Ratio (OR). Operating Ratio indicates how much railway spends to earn a rupee. An Operating Ratio of 90% means that Railway is spending 90 paisa to earn 100 paisa (i.e. one rupee). A lower figure of Operating Ratio is thus regarded better and is indicative of better financial health of the system. Operating Ratio can be decreased by reducing expenditure and augmenting income and efficiency. Income can be increased by raising fares and expanding its revenue streams. Raising passenger and freight fares are always politically sensitive issues.

Historically, an Operating Ratio of Indian railway was not a problem in 1960s and 1970s. The best ever OR of Indian Railways was 74.7% in 1963-64. However, for the last few decades, this ratio is lingering between 92 to 98.5%.

In 2014-15, the budgeted Operating Ratio was 92.5% against which it has been able to get some better position by achieving 91.3%. In 2015-16, the operating ratio is 90% mainly due to savings of Rs. 8,720 crore. However, for 2016-17, the government has targeted an O.R. of 92%.

The key reason for 2% increase in budgeted OR is the additional burdens of Rs. 21,000 crore on account of 7th pay commission.

We note here that in 2008-09, when the railways had to implement the 6th Pay Commission report, the Operating Ratio had gone chaotic. In 2007-08, the OR was 75.9% due to good economic growth and robust earnings from freight. Thereafter, the O.R. went up to 88.3% in 2008-09 and 95.3% next year. Further, half of railways earnings generally go towards meeting wage and pensions. Thus, despite of charting out above 10% revenue growth plan, this budgeted OR of 92% seems to be unrealistic. The logic behind this is that around half of railways’ earning go towards meeting wage and pension bills of employees in normal course, and due to huge pay pressure, the ratio might worsen in budget year 2016-17. The calculations of railway might go haywire due to absence of a solid road map to boost the earnings.

Cross Subsidization

Indian Railways has to meet the aspirations of two kinds of end-users viz. passenger segment and the freight segment. Freight segment has traditionally been used to cross-subsidize the first in the hope that both will then flourish; however, neither has. Money earned through freight traffic got diverted to meet the shortfalls in passenger revenue, and thus the development of freight traffic infrastructure suffered. This also implies that the passenger fares were kept artificially low through cross-subsidies. But due to this, there was never enough money left to invest into the passenger amenities. This is the reason that Indian Railways is not able to provide even the basic passenger amenities.

Further, the cross subsidization by diversion of freight earnings has also helped only till a point. Raising freight fare beyond that point would become counterproductive by driving away freight business. Overall, the problem of cross subsidization has severely affected the internal revenue generation of the Indian Railways.

Social Service Obligations

Railways is barely able to cover its expenses because of the massive Social Service Obligation imposed by years of populist budgets. Apart from being a commercial organization; in the larger social and national interest, Indian Railways is required to engage in certain uneconomic operations to provide affordable transport facilities to poorer sections of society and to facilitate the movement of essential commodities at below normal costs. The losses incurred by Railways on this particular account are called Indian Railways “Social Service Obligation”.

The latest budget documents reveal that Indian Railways carry Social Service Obligation of more than Rs. 20,000 Crore, which is nearly 16.6% of Gross Traffic Receipts and is almost half of Railways’ Plan Outlay under budgetary sources. The result is that:

Railways can hardly have adequate resources for its development works.
Most of money it gets is spent on its running, thus no money for looking beyond running operations. This is shown by the operating ratio which denotes what percentage of money goes into running the Railways. Surplus has decline and there are hardly any resources for development works. There is a rising dependence on budget.
The Rail budget documents reveal that currently, Railways loses 23 paise per passenger per km.
In the words of former Railway Minister Gowda, Railways are into the situation of severe funds crunch for many years, which is a result of the ‘decade of golden dilemma’ – the dilemma of choosing between commercial viability and social viability.

Salaries not function of commercial viability

The salaries of the Railway staff are NOT fixed in relation to the earning potential of the Railways. Some argue that the pay scales of Railways employees are fixed by Central Pay Commission which is an extraneous organization; and unlike a commercial organization, the salaries are not function of commercial viability. Further, the pension liabilities are met out of its own earnings and not from the Consolidated Fund of India, as in the case of the other Ministries.

Competition with Roads

Since the railway routes are saturated and quality of service is low / unreliable; the railways are losing market to roadways. Further, since most of the national highways run parallel to railways, they are consistently eating up the revenues of the railways.