Moneycontrol
Apr 19, 2017 05:10 PM IST | Source: Moneycontrol.com

Chidambaram’s criticism on railways is right but only partially

Chidambaram’s criticism on railways is right but only partially

Shishir Asthana

Moneycontrol Research

Railways Minister Suresh Prabhu is known as one of the top-performing ministers of Prime Minister Narendra Modi’s government. Known for his management skill and out-of-the-box approach in problem-solving, Prabhu has been credited with bringing in a sense of urgency in his ministry.

However, as ex-finance minister P Chidambaram points out, the numbers do not reflect the efforts. In a tweet Chidambaram said: ‘Railways worst operating ratio in 2016-17. Previous worst in 2000-01. Both under BJP governments! Despite well-meaning minister. Problem of Railways is deeper. It cannot be run as a department of government.’

Operating ratio is the amount of money the Railways needs to spend to generate revenue of Rs 100. Thus, an operating ratio of 96.9 percent means that Railways spends Rs 96.9 to generate a revenue of Rs 100. The lower the ratio, healthier the financials as the Railways gets more money for modernization.

There is no doubt what Chidambaram is saying is the truth; government records say so. For the financial year ended March 2017, the Railways has posted its worst operating ratio in 16 years at 96.9 percent. What makes Chidambaram accusation stick is that the numbers are worse than government’s own revised budget estimates. Minister of State for Railways, Rajen Gohain, in a written reply in the Lok Sabha, said that the operating ratio in 2016-17 was estimated at 94.9 percent.

However, as in any large organisation, is looking at one metric enough? Clearly, no.

Chidambaram seems to have forgotten that the present state of the Railways is a gift from his government to the present one. With no fare hike in their decade-long rule, Chidambaram’s government handed over a Railways that had an unenviable track record on all fronts, be it safety, market share or growth.

Turning such a huge organisation around takes time and money. While Prabhu has pumped in the money, the rewards are just starting to trickle in. Railways recorded its highest-ever revenue generation of Rs 1.72 lakh crore despite lower revenues from coal, which accounts for 50 percent of its freight income. It hauled a record 1.107 billion tonnes of goods despite losing 20 million tonnes in coal due to low demand from thermal power plants and steel producers.

Further, Prabhu had to deal with the impact of the Seventh Pay Commission; salaries are a significant portion of expenses.

Rationalising freight rates and setting an independent body to determine passenger rates will have a long-term impact on the Railways’ financials. Prabhu had launched various policy initiatives to increase non-fare revenue like out-of-home advertisement, content on demand, rail radio, branding of trains and an ATM policy. Railways expects to earn Rs 3,475 crore each year from these non-fare revenue initiatives. This is a very high-margin revenue with most of it trickling down to the bottomline.

During Prabhu’s tenure Railways has undertaken various capital expenditure projects which are at least three times the size of those taken during the times of the government of which Chidambaram was a part.

Rating agency CRISIL seems to be optimistic on the Indian Railways as in a recent report it pointed out that Railways’ operating ratio will improve to 89-90 percent by 2021, once its investments start showing results. That will be a new record to watch out for.
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