Indian Railways’ Finances Are In A Mess And It’s Time For Fare Hikes

Does the Indian Railways earn anywhere near enough to fund its own capital expenditure (capex)? With additional budgetary support from the government, it would probably not need to borrow heavily from the market for laying down new tracks, speeding up investments in safety infrastructure and other capex heads. Wrong. The fact is that a cash-starved government has been releasing lesser budgetary support than promised, the railways is not earning anywhere near enough by carrying passengers and freight, and it now has to borrow heavily to continue with its capex plans.

The Indian Railways’ finances are obviously in a mess and it is high time there were some fare hikes to improve the situation. Of course, fare hikes alone won’t help, the railways needs to rework its freight versus passenger subsidy skew too. Also, it needs to tweak its suburban rail networks policy, where it is incurring heavy losses in providing transport across various states.

In a written reply in Lok Sabha, Minister of State for Railways Rajen Gohain said that since 2014-2017, railways had incurred a loss of Rs 4,280.50 crore by running the suburban rail network in Mumbai.

Here, the railways is looking to be lenient and asking states’ share in suburban networks to be reduced to 50 per cent from 80 per cent mandated earlier, in return for some specs change in station area. Is it wise to invest more in suburban networks when such investments are bringing in losses on a large scale?

Gohain indicated in this reply that not only is the railways not keen to increase passenger fares, it also continues to incur losses every year by performing a variety of un-remunerative services such as (a) keeping ordinary second-class fare low (b) keeping suburban and non-suburban season ticket prices low (c) incurring a loss on essential commodities carried below cost (d) losses on a variety of concessions granted on passenger tickets. Working of uneconomic branch lines, too, imposes a heavy burden on Indian Railways’ finances. The overall losses incurred on coaching operation services and on essential commodities carried below the cost of operation was Rs 35,959.59 crore in 2015-16.

The Indian Railways subsidises passenger fares by charging higher freight rates. Now that neither freight loading nor passenger numbers are witnessing healthy growth, improving internal resource generation is a very tall task for the railways.

According to a Parliamentary Standing Committee report on the demand for grants to the railways for 2018-19, the total annual outlay for capital expenditure in 2018-19 is estimated at Rs 146,500 crore (up from Rs 12,000 crore in the current fiscal), comprising gross budgetary support of Rs 53,060 crore, internal resources of Rs 11,500 crore and extra budgetary resources of Rs 81,940 crore consisting of marketing borrowings, public private partnership (PPP) and institutional financing.

In fact, the lowest ever internal resource contribution to capex in the last six years is likely next fiscal. In 2014-15, more than a fourth or over 27 per cent of the Indian Railways' capex was being financed by its own internal resources, this percentage will fall dramatically from April this year when only 7.85 per cent of the capex will be funded from the railways' operational earnings. Only about a sixth of the planned capex will be funded under the Union Budget, leaving a whopping 55 per cent of the funding at the mercy of lenders, institutional financing and PPP projects. No wonder then that Indian Railways has set itself the highest market borrowings target next fiscal since 2015-16 at Rs 28,500 crore. It was Rs 24,786 crore in revised estimates of 2017-18; Rs 14,279 in 2016-17 and Rs 14,097 crore in 2015-16. Funding through PPP and institutional finance will also be the highest next fiscal.

This piece says the Indian Railways top brass is worried over the transporter’s finances and is now commissioning study on how to shore up revenues by Rs 30,000 crore. Budgetary support for 2018-19 at Rs 53,060 crore is lower than the budgeted sum of Rs 55,000 crore for 2017-18, with the revised estimates for 2017-18 at just Rs 40,000 crore.

To mitigate this situation, the railways has targeted a stupendous growth in non-fare revenues at almost 48 per cent – this includes earnings from land, advertisements and publicity – but this is simply not enough to improve the borrowings target and overall financial health of the national transporter. Make no mistake, 90 paise of every rupee earned by the railways comes from passenger and freight transport – and it is projecting a rather modest increase in both these earnings. Freight earnings are expected to be higher by 3.8 per cent at Rs 121,950 crore, while passenger earnings are slated to go up by 3.7 per cent to Rs 55,000 crore. Freight accounts for 65 paise of every rupee earned by the railways and freight earnings have been declining as rates remain unattractive compared to other modes of transport like roadways. Besides, bulk of the freight traffic has been restricted to 10 commodities and the basket is only now being expanded to almost 40. The average cost of service in freight is 99 paise per 10 kilometres but users are charged around Rs 1.60, which is then used to cross-subsidise passenger traffic, where roughly only around 50 per cent of cost of our service is charged.

Due to expansion of road sector, railways have also witnessed a migration of short distance non-suburban passengers to road. Low-cost airlines are also posing steep competition to the upper-class passengers’ services. The railways must get its house in order by raising passenger fares, getting its act together on freight rates, freight basket etc, while also simultaneously tapping sources for further increase in non-fare revenues.