Off track: Declining operating ratio shows Railways' poor financial health

Railways' accounts reveal it spent Rs 98 to earn Rs 100 in 2019-20. Business Standard analysis shows accounting practices mask the actual operating ratio

In 2019-20, the capital expenditure of Indian Railways (IR) increased 60 per cent over 2016-17. The draft National Railways plan envisages a further increase in IR’s capital expenditure, but an analysis by Business Standard shows that IR has come to depend more on borrowings and budgetary support. In 2016-17, while 11 per cent of its capital expenditure (capex) was funded by internal sources, in 2019-20 the ratio dropped to less than 1 per cent. A 2015 Committee on Restructuring Railways had flagged that over-reliance on borrowings could exacerbate the financial situation of Railways.

Although staff costs and increasing pension liabilities are a significant source of drain for IR—staff costs account for over 70 per cent of the expenses—on the revenue side, the national carrier hasn’t performed too well either. Freight earnings are down, and passenger services have suffered. A report by the Comptroller and Auditor General (CAG), released in September 2020, showed that freight profits could barely catch up with passenger losses. 

The Railways has also failed to capitalise on its assets. Sundry earnings, which account for revenues from advertising and lease of space and land, have also fallen. 

Amid all this, the Business Standard analysis found that Railways' spending on subsidies had increased manifold. 

In 2004-05, Railways spent Rs 5,738 crore towards its net social sector obligations—revenue forgone due to transporting essential commodities, passenger concessions and fare subsidies. Last year (2019-20), Railways’ obligations had ballooned nine times to Rs 45,542 crore.

Revenues did not grow proportionately. While net social sector obligations accounted for 16.6 per cent of the total revenues in 2004-05, their share had risen to 26.6 per cent in 2019-20.

Of the total working expenditure, social sector obligations account for 22.2 per cent.

It is not surprising then that the operating ratio—the amount IR spends to earn Rs 100—has increased drastically over the years. In 2012-13, it spent Rs 90 to earn Rs 100; in 2019-20, it had to spend Rs 98 to earn Rs 100.

This figure, too, is fallacious. For the last two years, CAG has been highlighting how Railways is adjusting advance payments to manage its operating ratio. In 2017-18, for instance, Railways took advance payment for freight from NTPC and IRCON, which helped decrease its operating ratio from 102.7 to Rs 98. Similarly, in 2018-19, it took an advance from NTPC and CONCOR to improve its operating ratio from Rs 101.8 to 97.3.

However, CAG's calculations only explain part of the problem.

Our analysis showed that the actual operating ratio for Railways in 2018-19 ought to be higher. And, this trend holds for the last few years.

Innovative accounting

Besides its net ordinary working expenses, the Railways appropriates two major funds each year—the pension fund and the depreciation reserve fund. The purpose of the pension fund is to service the growing pension corpus. The depreciation reserve fund is used by IR for renewals and replacement of fixed assets.

The appropriation under this head has reduced by over 90 per cent in the past five years. Instead, the Railways has been carrying out track renewal and repairs using the Rashtriya Rail Sanraksha Kosh. The RRSK fund with a corpus of Rs 1 trillion was started in 2017-18; repairs have been diverted from DRF to RRSK.

RRSK does not feature in the operating ratio calculations for Railways and is instead appropriated from profits. While the Railways was to contribute Rs 15,000 crore for the last three years towards RRSK corpus, it has been able to make provisions for only Rs 5,225 crore.

If RRSK calculations are moved back to DRF, then operating ratios go haywire.

Railways has also not been paying dividend on its borrowings from the government since 2015-16. While the loan from the government to the Railways is considered a loan in perpetuity, up until 2014-15 the carrier was paying a dividend of 4 per cent on it. But given its dwindling finances, a Parliamentary Committee discontinued this practice until 2020-21. 

The CAG report further highlights that even the calculations for appropriation to depreciation reserve fund may not be based on fundamentals. 

Last year, in a valiant effort, the government included off-Budget borrowings to reflect in the fiscal deficit to present a better picture of government finances. 

Railways may need to do the same, especially when it is embarking on an ambitious national rail plan for 2030.