Indian Railways (IR) has large-scale financing requirements due to the capital-intensive works that are being undertaken by it. The funds are primarily used for the creation of rail infrastructure (railway stations, new lines, etc.), acquisition of rolling stock and electrification of lines. IR has limited leeway to take tough economic/business decisions, as it has a social responsibility too. Thus, its finances are often on fragile ground.
Over the past year, a number of factors caused the decline in growth in IR’s earnings. Freight traffic, accounting for over 65 per cent of total revenue generation, plateaued due to a number of reasons. These include sluggish economic (and industrial) growth, deficient rainfall (impacting farm freight) and muted mining activity (the sector is IR’s largest client). Further, a decline in diesel prices has rendered road transport more competitive. The situation is further aggravated by high freight charges which are substantially higher than those in many other countries. IR cross-subsidises freight and passenger fares; the former is much higher so as to keep the latter at a lower level.
As stated in the Railway Budget 2016-17, IR’s gross traffic receipts (accounting for 98 per cent of total earnings comprising freight, passenger, sundry and other coaching earnings) for 2015-16 are slated to fall short of the budgeted target (Rs 1,835.78 billion) by Rs 157.44 billion, with the slowdown hurting both goods as well as passenger traffic. In 2016-17, IR targets a revenue generation of Rs 1,848.2 billion. During the period 2010-15, the total earnings of IR increased from Rs 967 billion to Rs 1.63 trillion (revised estimate for 2014-15), a compound annual growth rate (CAGR) of 14 per cent.
In terms of expenditure, IR has a rather complex outgo of funds. Of every rupee spent, the maximum share is incurred on the payment of staff salaries and allowances. Another key contributor to costs is fuel charges. Besides, pension-related appropriations too form a significant portion of IR’s costs. Implementation of the Seventh Pay Commission is likely to increase the salary and pension outgo further.
During 2015-16, stringent austerity measures were adopted to contain working expenses; IR’s expenditure for the year amounted to Rs 608.84 billion (revised estimates), as against the budget estimate of Rs 765.75 billion. For the next fiscal year, this figure is pegged at Rs 786.6 billion. During the period 2010-15, IR’s total expenses increased from Rs 903 billion to Rs 1.47 trillion (revised estimate for 2014-15), a CAGR of 12.96 per cent.
A key parameter to gauge IR’s financial health is its operating ratio, which indicates the amount spent to earn one unit of operational revenue. Thus, the lower the value of the ratio, the better it is for the organisation’s financial situation. The railway budget targets an operating ratio of 92 per cent for 2016-17. The higher operating ratio is due to the financial burden arising from the recommendations of the Seventh Pay Commission. Meanwhile, the operating ratio target of 88.5 per cent set last year remains unachieved; the revised estimate has been pegged at 90 per cent.
Considering the five-year period from 2010-11 to 2014-15, IR’s operating ratio has declined from 94.6 per cent to 91.8 per cent (revised estimate). The year-on-year improvement, from 93.6 per cent in 2013-14 to 91.8 per cent in 2014-15, was a marked achievement. It was the first time in seven years that the ratio improved upon the budget estimate target.
Going forward, to meet investment targets, the ministry plans to mobilise funds from the Life Insurance Corporation of India. The Indian Railway Finance Corporation will also issue infrastructure bonds. A development fund will also be set up with assistance from multilateral institutions such as the World Bank. Besides this, new avenues of revenue will be explored – monetising land and buildings through commercial use of vacant land and space rights over station buildings, land along tracks etc. The Ministry of Railways (MoR) targets increasing advertising revenues by over 300 per cent. It also plans to liberalise the current parcel policies. This includes opening up the sector to container train operators and providing services to the growing e-commerce business. In addition, the MoR has set a revenue target of Rs 40 billion by 2020 from manufacturing rolling stock and rail components for the domestic and international markets.