The surprising truths the pandemic has exposed about Railways' functioning

While better performance this year shows the enterprise could do without its passenger train service, the downside is that there is little scope for its operating ratio to drop below 90%

First the good news. The Indian Railways could show a far better performance this year because it hardly ran any passenger trains. If the social distancing norms persist beyond March 2021, the Railways could actually get a positive net revenue in FY22 than those achieved so far by suppressing costs. 

The bad news is that even then the key performance metric of the Railways, the operating ratio (OR), a measure of how much it costs them to earn every single rupee (the percentage of total working expenses to gross earnings) shall not improve to less than 90 per cent. Had it not been for the sunk costs, mostly salaries and pension, the national transporter could have come out of the pandemic with an improved balance sheet. Yet there is no denying that the biggest slice of actual improvement to the Railways has been the pandemic, not any turnaround plan to improve its performance.  

The Railway Board has however been cagey. In a reply to an RTI query it has projected a possible loss of Rs 40,000 crore blaming it partially on the lack of the passenger services. However as we shall see later, the passenger revenue is not even adequate to pay for itself and has to be subsidised by freight services. So a year spent without that subsidy is a good year. The Railways is far better off without its passenger train services. 

It is a freak turnaround story for the Railways. Appropriately enough, railway minister Piyush Goyal has begun a scheme this year to offer 151 passenger trains to be operated by the private sector. This year’s operation of the Railways gives an undiluted chance to observe what ails it and what doesn’t. It’s dowdy accounts and the huge interlocking data made it almost impossible to do this health check any other year. One of the best places then to begin the search is to examine their cash authorisations.

Passenger train services came to a halt as the nation entered lockdown since March this year and has not yet recovered. Against an average of daily 13,000 pairs of long distance and suburban passenger trains the transporter ran before Covid arrived, it has run just 436 special trains, mostly Shramik Specials and 283 festival trains upto the end of November and another 3,000-odd suburban trains. There is just no comparison.

The Railways were slated to earn Rs 61,000 crore from all its passenger train services this year, about 27 per cent of its total receipts. Till the end of September it has earned only Rs 1,258.74 crore. Even if movements rise in the second half of the year the actuals will not cross Rs 10,000 crore. The almost total wipe out of passenger earnings may seem a big hole in its finance, but it is not. The passenger earnings are less than what Railways earn from ferrying coal at Rs 67,355.22 crore. The enterprise would have been in a big hole if the coal business had stalled and the passenger business had run. Since it is the other way round, the year could turn out just fine for the Railways. 

The railways do not do any costing for its passenger trains so it is difficult to surmise how much the stoppage of each train will cost them. The Bibek Debroy led committee did try to figure out such an exercise but could only do an illustrative study for a half dozen odd Rajdhani and Shatabdi trains. 

From an economic analysis point of view for any company, and the Railways after all is a commercial enterprise, there are two principal categories of costs. These are variable and fixed costs. Even when a company is not producing anything, its fixed costs do not go down. The variable costs do. In the case of Railways, however, there is hardly any variable cost. This is why the enterprise is in trouble and the pandemic could show where some of those troubles could be solved.

The statement of railway receipts and expenditure for 2020-21 show this clearly. This year for instance, it will spend Rs 34,720 crore as operating expenses on traffic services. It is a euphemism for payment of salary and office expenditure for its staff. This should have been a variable cost but the railway staff are all permanent and will earn all their wages and allowances, even though no trains have run this year. Not even any travel allowance will be pruned.  

The segment where there shall be savings instead is from the Rs 60,623 crore it was to spend on on repairs and maintenance of train tracks, on locomotives, on passenger cars, and even on plant and equipment plus anything that moves on rails. Many of these could qualify as fixed costs, but in the world of Indian Railways, this is where there are savings avenues. 

There is a revealing figure from the railway year book of the operating costs of passenger coaches and of wagons. It is 192.49 for the former and 58.72 for the latter. Which means for the railways it costs three rupees to provide passenger services for every one rupee they earn from it. When the trains are not running these costs evaporate.  

There is a crude indicator to show that it is indeed happening. In each month of the year the Railway Board sends out a cash authorisation statement to every zone. On the basis of the cap set in the statement each zone undertakes actual expenditure. Typical of the Railways, each month it sends out two more authorisations modifying the preceding ones. The sequence never fails. In 2020, however, this sequence was broken. There was more than one month when the zones made do with a single order. More importantly while the expenditure on staff salary and pension numbers have not changed year on year, the spending on works has come down. In November this year the actual spending was 16 per cent less on this head, year on year. It was Rs 2,945 crore compared with Rs 3,525 crore in November 2019. The trend has held up through this year. Some of it could be attributed to the shortfall in aggregate receipts. 

The Railways will also make savings on fuel. The annual budget estimate was Rs 29,858 crore. 70 per cent of this is diesel, half of which is for passenger services. This means a straight off savings of Rs 10,450 crore. As the chart shows, the spend on passengers per unit for either diesel or electricity is thrice that of freight traffic. 

Summing up, the Railways are in sweet spot. What will still act as brake on the Railways from turning in an improved performance? It is the velocity at which its staff costs have risen which now accounts for close to 65 per cent of its total receipts. Struggling to pay its pension bill it had under provided for the liability this financial year (FY21). The underfunding was crucial to help the railways show a net positive earnings of Rs 6,500 crore in FY20. These are unnerving statistics but not new.

The Railways has earned Rs 75,294.83 crore from its freight business in eight months of this financial year which is 51.2 per cent of the budget estimate for the year at Rs 1,47,000 crore. For the past three months this head is growing at just above the 9 per cent rate of growth estimated in the budget, but it will not be enough to make up for the shortfall recorded in the four months April to July. For the first time in decades, it will not have to subsidise any passenger services. 

In the annual budget for FY21, finance minister Nirmala Sitharaman had pencilled in an OR of 96.2 per cent. The estimate was better than the 97.4 per cent recorded in FY20. A lower OR number means better performance. The pandemic could have improved this ratio down all the way to below the 90s, something that the transporter had never reached in more than a decade. 

Yet the Railways will cover some more of the distance to its gross earnings when Sitharaman tables her budget papers on February 1, 2021. It is something to cheer.