Operating Ratio in Indian Railways
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.
