The CAG performance audit found unpurified tap water being used to make beverages, uncovered and unwashed waste bins, food left out in the open, and rats and cockroaches at catering units in trains and stations.
The report was prepared after inspections at 74 stations and 80 trains, covering the period from 2013 to 2016 and issues of earlier years which could not be reported earlier.
The Railway Ministry, meanwhile, said in a statement that measures have already been put in place to control and improve food quality.
A senior official of the ministry claimed that while 11 lakh meals are served on trains everyday, on an average there are only about 23 complaints per day over catering.
The statement said catering has been a "top priority for the railways" and the minister, "Suresh Prabhu was specially cognisant of the issues."
"A policy of zero tolerance towards bad quality of food served to passengers and overcharging is being followed and during the last six months, seven contracts have been terminated on account of poor quality of food served," the statement said.
Disciplinary action has also been taken against 21 railway officials and more than 40,000 inspections have been done by railway officials to improve catering services, it said.
The CAG report also pointed out that frequent changes in the catering policy and the consequent transfer of responsibility to manage catering units have created a state of uncertainty in management of the services.
"On the initiative of the minister we identified that the problem was so entrenched that unless the policy was changed and contract frameworks completely overhauled, things would not change permanently. We also realised that unless the quality of food at source is not controlled, on-board quality would not change," the ministry statement said.
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