The Indian Railways’ revenue problem

Indian Railways’ capex has risen, but its operating ratio has not improved. Debt repayment is 17% of revenue receipts. IR’s freight segment is profitable, but passenger segment makes losses. IR’s modal share in freight business has decreased. IR must shed artificial divide of goods and parcels to improve freight business. 11 commodities account for 90% of tonnage and revenue. NTKM has fluctuated over the years. Series examines how IR can improve freight business.

This is the first of a three-part series of articles on the Indian railways, its capital expenditure and freight business.

The Indian Railways (IR) has been on a spending spree with respect to capital expenditure (capex), particularly after the government merged its rail budget with the main budget. However, its operating ratio, which is the ratio of ordinary working expenses to the gross traffic receipts, has shown no improvement. A lower ratio implies better profitability and surplus for capital investment.

Since the IR continues to have a total lack of surplus, it has been augmenting the funds raised through Gross Budgetary Support (GBS) and Extra Budgetary Resources (EBS). The merging of budgets helped this cause as GBS from the central government could be increased without much scrutiny. However, with respect to EBS, there is a price to pay. The IR’s spending on repayment of principal and interest is pegged at ₹22,229 crore and ₹23,782 crore respectively, which together make it 17% of revenue receipts, a sharp rise from less than 10% till 2015-16. It appears that this debt liability was noticed as capex relied almost entirely on GBS in this year’s budget.

Despite this, the unprecedented rise in capex appears to be predicated on the premise that the IR’s operating and financial performance should not be viewed in isolation but along with its role as an engine for the growth of the country’s economy. Investment in railways boosts manufacturing and services, tax revenue for the government and allows for more job opportunities. However, a key organisation like the IR cannot be allowed to go the Air India way — the investments made should be productive for IR’s revenues.

The IR’s freight segment is profitable whereas the passenger segment makes huge losses. The Comptroller and Auditor General of India (CAG) report presented in Parliament on August 8, 2023 states that there was a loss of ₹68,269 crore in all classes of passenger services during 2021-22, with all the profit from freight traffic nullified in cross subsidising passenger services. This is nothing new for the IR but the situation has become grimmer and since any significant increase in passenger fares is unlikely, the IR has no option but to boost its freight volumes and in turn its revenue.

The annual growth in freight volume and revenue of the IR in the period April-July 2023 stand at 1% and 3% respectively, while the economy grows at 7%. This is a dismal performance. The IR’s modal share in India’s freight business has steadily decreased to approx. 27% from upwards of 80% at the time of independence.

The objective of this series is to examine how the freight business of IR can be improved. The movement of cargo by the IR is artificially divided into goods and parcels. The division is not semantic but indicates a paradigmatic difference in approach with respect to tariff rules, handling, moving and monitoring. Shippers, however, are not interested in these differences as their concern is mainly about the safe movement of their cargo from point A to B at the least cost and as fast as possible. The time has come for the IR to shed such an artificial divide so that cargo can be divided based on its characteristics as bulk and non-bulk (or value added).