Indian Railways maps the way to bridge widening gap in capex and revenues

The Indian Railways (IR) does not internally generate even 5 paise of every rupee earmarked for its annual capital expenditure (capex). And since the gross budgetary support has been falling short of expanding capex needs each year, the dependence of the country’s biggest transporter on extra budgetary resources (EBR) has been increasing.

In the last five years, the annual capex has nearly doubled to Rs 2.15 lakh crore in 2021-22 budget estimates. The arrival of COVID-19 on Indian shores last year made matters worse since train services remained completely suspended for months, dealing a crippling blow to revenue generation. Given this state of affairs, IR now finds itself under increasing pressure to augment revenue.

A parliamentary standing committee examining the demand for grants of IR for the current fiscal has ticked it off for just 3.4 percent of capex being funded from internal revenue generation. For the last five years, not once have IR’s revenue crossed the 3.5 percent mark vis-à-vis capex. The parliamentary panel has also suggested that there be a “prudent adjustment” of passenger fares and also that the central government should take over the pension burden of IR.

Staff wages and pension account for nearly two-thirds of IR’s total annual expenditure and constrain the allocation needed for safety measures and funding capex.

On its part, IR says, it has taken several steps to maximise revenue. The freight carriage policy has been completely overhauled and freight loading has therefore increased significantly across the railway network even during the pandemic years. Freight accounts for nearly 85 paise of every rupee earned by IR and the freight earnings have been traditionally used to cross-subsidise passenger fares.

Cost Recovery

IR has raised passenger fares too. For example, tickets are now priced higher on semi/high speed trains such as the Humsafar Express, Tejas Express, Antyodaya Express and Mahamana Express, Vande Bharat Anubhuti coaches and Gatimaan trains.

The pricing on these trains is being done on a ‘cost recovery basis’ unlike other passenger trains where fares continue to be highly subsidised. Then, for the premium trains, Rajdhanis, Shatabdis and Durontos, the flexi fare scheme continues. This allows for fixed increase in fares as seats fill up in a coach and generates additional revenue for IR. Next on the agenda is IR giving up some overburdened routes to private operators to run trains with complete autonomy on fares. The IR will earn revenues on a pre-determined formula, without having to invest in either rolling stock or capex.

And the latest in this series of moves to rationalise passenger fares is reduction in the number of categories of fare concessions IR was offering before COVID-19.

In reply to a question on whether the government intends to restore concessions, which are availed by less than 12 percent of reserved category passengers, Railway Minister Ashwini Vaishnaw told the Lok Sabha: “In view of pandemic and COVID protocol, concessions to all categories of passengers (except four categories of Divyangjan, 11 categories of patients and students) have been withdrawn from March 20, 2020 till further advice. Representations, requests and suggestions from different quarters have been received for restoration of all concessions. The matter has been examined but not found feasible.”

Vaishnaw has also said in reply to another question that the IR had to forego Rs 2,059 crore in revenue due to various concessions in 2019-20 (Rs 38 crore in 2020-21). The amount foregone in concessions in FY20 was the highest in at least four years. The details of concessions which have been scrapped were not divulged by the IR spokesperson.

So the actions so far have been around raising fares on select routes and through varied mechanisms, instead of announcing any across-the-board passenger fare increase.

How the screws are tightening was evident earlier this year: An order from the IR in October, which mandated that half of the convenience fee revenue earned by its listed ticketing arm IRCTC (Indian Railway Catering and Tourism Corporation) should accrue to itself, led to a debacle for IRCTC on the bourses. The IRCTC scrip tanked within days, forcing the IR to reverse this order.

A former senior IR official, who requested anonymity, pointed out that the biggest problem with IR was low, across-the-board productivity. This person also said that any across-the-board passenger fare increase will always be a political decision. With the Uttar Pradesh polls nearing, there was little chance of any increase in passenger fares for non-premium services in the coming weeks, he added.

Sudhanshu Mani, former GM at the Integral Coach Factory Chennai, who oversaw the production of Train18, pointed out: “Capex has increased substantially in the last few years. While some of the funds for this capex were on an interest holiday, that period may be coming to an end and unless the capex gives good return, financial woes of railways would worsen.”

An efficient mechanism to understand the financial position of the IR is the operating ratio, which denotes the spending done to earn each rupee. The parliamentary panel has said that OR is estimated to be 131.4 percent for 2020-21, implying significant deterioration in the overall finances of the IR; the projection for the current fiscal is 96.15 percent.

The IR has said that for the medium and the long run, policy initiatives are being undertaken to diversify the freight basket to achieve a loading of 2,024 MT by 2024, substantially regain market share in freight, and make heavy investments in capacity augmentation projects so that the OR improves to “a reasonable level”.

But will these suffice to bridge the widening gap between capex and revenue generation?