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Last Updated : Sep 25, 2020 01:06 PM IST | Source: Moneycontrol.com

Why the CAG found Indian Railways' finances in a sorry state

The CAG peeked through Indian Railways’ window and found it was dressing up numbers. Including advance freight earnings has done little to tackle the national transporter’s continuing pain. Internal resource generation has dwindled and dependence on borrowings is rising

Indian Railways (IR) has been pulled up by India’s federal auditor for “window dressing” its finances for 2018-19. While the national transporter showed a net surplus of Rs 3,774 crore in that year, the Comptroller & Auditor General (CAG) has referred to accounting practices that call such a surplus into question.

IR had included advance earnings from two public sector units, NTPC and CONCOR, in its total freight earnings for 2018-19. The total amount received from these two PSUs was Rs 13,000 crore, of which Rs 8,351 crore was meant for freight carriage in 2019-20. If one were to exclude this amount (Rs 8,351 crore) from IR’s total freight earnings for FY19, then it would have ended with an overall negative balance instead of a surplus for the fiscal year.

Will IR discontinue this practice of taking a freight advance just before a fiscal year ends and including this money in freight earnings for the same fiscal year? Dressing up finances has, in any case, done little for the transporter over the last few years, as its internal resource generation has kept dwindling and dependence on borrowings has been rising.


Poor operating ratio

IR’s finances have been in a mess through much of the Modi government’s tenure and successive parliamentary standing committees have flagged this issue. Just one metric will suffice to buttress the continued financial pain: IR’s operating ratio has been over 90 percent since 2014-15, and since 2016-17, this number has been consistently over 95 percent. Operating ratio (OR) denotes the amount IR spends to earn Rs 100 and a consistent high-nineties ratio shows that the national transporter has been spending hand over fist to get by.

The inclusion of advance freight earnings of the next year in the earnings for 2018-19 was also seen by the CAG as an attempt to keep a galloping OR in check; had the advance payments from NTPC and CONCOR not been included, the OR for FY19 would have been well over 100.

Also, in each of the Modi years, the OR estimate given by IR at the beginning of the fiscal year was much lower than the actual figure (which emerges well after the year has ended). In 2017-18, the OR was the highest in 10 years, at 98.4 percent. So, while the observations made by the CAG are for IR’s finances for 2018-19, they hold added significance this fiscal since IR’s finances have been further impacted by the pandemic-induced lockdown and earnings have taken a severe beating.


IR has three primary sources of revenue. 1) Gross Budgetary Support (GBS), the sum it gets from the Central Government’s budget allocation each year. 2) Internal Resources, or what it generates through operations and 3) Extra Budgetary Resources (EBR), which include borrowings, earnings through partnerships and institutional finance.

Since 2016-17, internal resource generation has been falling drastically as a percentage of IR’s total annual capital expenditure, thus putting pressure on the transporter to continue financing its ambitious capex plans through an increase in EBR.

In 2016-17, nearly 11 paise of every capex rupee came from what IR earned through its own endeavors. But by 2019-20, just three paise of every rupee spent on capex was being generated internally. During the same period, the government’s budgetary support for IR’s capex increased to nearly 44 paise of every rupee from about 41 paise in 2016-17.

The significant increase in EBR, from 48 paise to over 53 paise of every rupee, is also a matter of concern. This has translated, among others things, into market borrowings rising by almost a third between 2016-17 (actuals) and budget estimates for the current fiscal. In 2016-17, total market borrowings stood at about Rs 41,000 crore but they have now jumped to over Rs 55,000 crore.


IR’s actual gross traffic receipts have been falling short of the target set at the beginning of the year for each year under the Modi regime, thereby resulting in a declining contribution from internal resources to its capex each year.

In 2015-16, actual gross traffic receipts were lower than the budget target for that year by more than Rs 19,000 crore; by more than Rs 19,500 crore in 2016-17; by nearly Rs 8,500 crore in 2017-18; and by nearly Rs 11,000 crore in 2018-19.

In 2019-20, the budget estimate for gross traffic receipts was pegged at Rs 2.16 lakh crore but the provisional estimates available till now suggest the actual receipts are short by over Rs 30,000 crore.

This significant gap between what IR has been envisaging at the beginning of each fiscal year and actual earnings at the end of the year would likely widen further in the current fiscal year. For one, passenger operations were shut during the lockdown months, and even now, only a few passenger trains are operational.

For freight, IR has taken several initiatives and senior officials have said that the expected shortfall in passenger earnings for 2020-21 would be made up through increased earnings from freight. Between April and September 24, while total freight revenue was still behind by over 18 percent year on year, it has begun showing y-o-y growth since August. Passenger revenue, however, is over 90 percent lower than in the same period last year.

But freight earnings are once again at risk due to the ‘Rail Roko’ agitation by farmers since September 24. Loading of some essential commodities, such as foodgrain, has already been impacted.

Given all the revenue uncertainties for 2020-21, Indian Railways needs to pull up its socks by slashing expenditure and enhancing freight revenue.

Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy.
First Published on Sep 25, 2020 01:06 pm