Time to put railway finances on track

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The country’s national auditor feels railway accounts are our of whack.

In its report on railway finances, tabled in Parliament on December 2, the Comptroller and Auditor General of India (CAG) has observed that the country’s biggest employer has recorded an operating ratio (OR) of 98.44 per cent in 2017-18, which is the worst in the last 10 years. For the uninitiated, the OR is the amount of money that the national transporter has to spend to earn each rupee. Obviously, lower the ratio, healthier are railway finances.

While the CAG report pertains to 2017-18, observers feel, railway finances do not seem to have dramatically improved in recent times. It is therefore worthwhile to take a close look at the CAG report to find out what actually ails the railways’ bookkeeping.

In its report, the CAG had observed that the OR for 2017-18 would have actually topped the 100-per-cent-mark had it not been for the advance that the railways received from NTPC and IRCON. But for this money, Indian Railways would have ended up with a negative balance of Rs 5,676 crore instead of a surplus of Rs 1665.61 crore.

What is of more concern is the fact that since 2016-17 railways’ revenue surplus has been falling which is indicative of failing financing health of the national transporter. The factors responsible for the generation of a meagre surplus are an increase in working expenses and a contraction in sundry earnings. It is to be noted that staff cost, including pension payments, constitute the bulk of railways’ working expenses.

Another point of worry is the falling share of internal resources in total capital expenditure. From a high of 26.14 per cent in 2014-15, it had fallen to 3.01 per cent in 2017-18. Obviously, a decline in generation of internal resources leads to a greater dependence on gross budgetary support and extra budgetary resources. With depleting surplus, the Indian Railways has to lean heavily on the central government and on extra budgetary resources (EBR) to fund its capital expenditure.

The EBR has two components: borrowings by the Indian Railway Finance Corporation (IRFC) and institutional finance through the Life Insurance Corporation of India (LIC). Whether it is LIC’s money or loans raised through the IRFC, an increased reliance on borrowings will further exacerbate the grave financial situation of the Indian Railways.

As a result of the poor state of railway finances, appropriation to the Depreciation Reserve Fund (DRF) has also decreased. According to the CAG report, under provisioning for depreciation had resumed in the piling up of “throw forward” of works.

Why is DRF important? Depreciation reserve is a business fund in which the probable replacement cost of equipment is accumulated each year over the life of the asset. It can be replaced readily when it becomes obsolete and totally depreciated. It is the total depreciation charged against all productive assets as stated in the balance sheet. The main rationale behind maintaining this reserve is that at the time of replacing an existing asset, the railways must have sufficient funds to purchase new assets.

While looking at the causes for the poor state of railway finances, the national auditor observed that in respect of concessions allowed to passengers of Indian Railways, 89.7 per cent of the revenue forgone on this account was because of fare relief granted to senior citizens and privilege pass holders. Moreover, the response to the “Give Up” scheme from senior citizen passengers was not encouraging. On the other had, the CAG had observed several instances of misuse of passes and irregular grant of concessions on medical certificates. The passenger reservation system, according to the national auditor, lacks adequate controls to validate the age of freedom fighters and to prevent irregular multiple bookings on the same privilege pass.

It is obvious from the CAG’s observations that the railways need to immediately address these issues to set its house in order. Priority should be given to the augmentation of internal resources so that dependence on gross and extra budgetary resources is contained. Unless internal resources go up, capital expenditure will suffer, which in turn will stand in the way of railways’ various modernisation initiatives. The national transporter should also focus more on public-private partnership models to lower its financial commitments going forward.

To plug the loophole in revenue forgone because of concessions in passenger fare, the railways must look at rationalising the privilege pass system. Instead of providing passes and fare reliefs, the national transporter can think of something in the line of the direct benefit transfer scheme in LPG so that the concession is actually enjoyed by the eligible beneficiaries.

Besides passenger earnings, the railways needs to focus on freight income too. The freight policy needs to be dynamic given the stiff challenge it faces from road transportation. A right combination of freight and passenger earnings can go a long way in augmenting the internal resources of the railways.

The CAG has come up with a number of recommendations to clean up the books of Indian Railways. If the government cares to implement them it can help the national transporter chug along the growth path.

Abhijit Kumar Dutta is a freelance writer. Views expressed are personal.