Over the past few years, Indian Railways has been facing issues with generating revenue. The financial situation of the Railways is likely to come under further pressure because of the implementation of the Seventh Pay Commission.
Sources of funds
Indian Railways is primarily financed through:
- Gross Budgetary Support from the central government
- Its own internal resources (freight and passenger revenue, leasing of railway land, et cetera), and
- Extra Budgetary Resources – which could be in the form of market borrowings, public private partnerships or PPPs, joint ventures, or market financing by attracting private investors to buy Railways bonds or equity shares in Railways.
Various Committees on Railways have observed that governments' investment planning on Railways tend to be driven by politics rather than need. This has resulted in the extension of unremunerative, yet socially desirable projects in every budget. For example, a train line to a remote rural area is socially desirable in terms of improving connectivity in remote areas, yet it may not yield adequate revenue. Which is why experts recommend that such projects based on social considerations must be categorised separately in the Railways accounts, and funding for them must come from the central or state governments.
While Railways receives budgetary support from the central government, its viability is dependent on the extent to which it can raise internal revenue. Railways’ internal revenue primarily comes from freight traffic (about 65%), followed by passenger traffic (about 25%). In the last few years, Railways’ internal sources have been declining, primarily due to a decline in its freight and passenger traffic. Over the years Parliamentary Committees reviewing Railways finances have observed that Railways’ projections for traffic receipts are unrealistic and actuals are most often below the set targets.
Among the different modes for transporting freight, the share of Railways has declined from 89% to 30% over the last 60 years, with most of the share moving towards roads.
The above change may to be attributed to roads consistently receiving more infrastructure investment.
The Budget speech of 2015-16 focussed on bringing in more external financing, especially through PPPs. But enough progress could not be made because of a lack of clear regulatory framework and poor market credibility of the Railways.
Experts and committees suggest starting off with simpler projects such as redevelopment of assets and maintenance of tracks and to set up an independent regulator.
The government has recently released a draft framework for the Rail Development Authority. But it remains to be seen to what extent the regulator will be independent in its functioning, and empowered to regulate private participation and competition in the sector.
Spending of funds
Railways spends about 56% of its money on salaries and pension. With the implementation of the Seventh Pay Commission, the spending on staff and pension is expected to go up even further, worsening the financial situation of the Railways. All eyes will be on how the 2016-17 Budget seeks to address the additional expenses arising because of this.
Operating Ratio is the ratio of the working expenditure (expenses arising from day-to-day operations of Railways) to the revenue earned from traffic. Therefore, a lower ratio indicates a better ability to generate surplus that can be used for capital investments such as laying new lines, deploying more coaches etc.
In the last few years, the Operating Ratio has consistently remained above 90%. This means that for every rupee that Railways earns, it spends more than 90 paise towards its day-to-day operations, leaving lesser funds for capital investments. The 2015-16 Budget estimated the Operating Ratio for the year to come down to 88.5%.
In the 2015-16 Budget, Railways sanctioned about Rs 6,600 crore for safety-related works to eliminate 3,438 level crossings. Projects on doubling/tripling/quadrupling of tracks along with electrification were announced at a total cost of about Rs 96,200 crore. The funding towards passenger amenities was proposed to be increased by 67%.
But the problem, as several committees have pointed out, is that Railways has a large number of projects riddled with time and cost overruns, and continued piecemeal allocations. Experts recommend prioritising existing projects, and asset maintenance instead of taking up new projects that do not generate sufficient returns.
With declining internal revenue, Railways’ investment on improving its operations and infrastructure will mostly depend on the support it receives from the government, and its ability to generate funds from the market.
In the last two years, no new trains have been announced, and the focus has been on improving existing infrastructure.
The railway budget for 2016-17 will tell us where the Ministry prioritises spending and how it plans to generate revenue for the same.
Prachee Mishra is Senior Analyst, PRS Legislative Research
