Multiple challenges to Indian Railways' financial sustainability, growth

Despite record capex and growth, the national transporter faces financial sustainability challenges with a precarious operating ratio and slowing incremental freight traffic

Transport is often understood as the means to an end — the carrier of people and commercial activity — but not the activity itself. But as history and geopolitics routinely show us, from the rise of the Roman Empire to the creation of the United States and the coming together of independent India, to the complex political landscape of war in West Asia today, transport infrastructure is national and nationalising infrastructure, and the brass tacks and raw material of national and regional growth. 

This is especially true when it is a public sector enterprise like the Railways in India. This mammoth operation carries over 20 million passengers and four million tonnes of freight traffic daily on its network spread across 69,000 route km: it is unprecedented in scale. It is the fourth largest rail network in the world, and the largest operating under a single management globally. More importantly, it has been efficient and impactful, driving forward development through India’s earliest days as a developing power, in its farthest reaches, and for its most vulnerable populations. 

Through network expansion, traffic output, economical freight and fare structures, and integrating people and economies of remote areas and regions, this railway system has relentlessly contributed to national growth and development. 

Budget 2025-26 provides the Ministry of Railways’ financial profile at an unprecedented ₹5.65 trillion, including revenue budget of ₹3.02 trillion (freight revenues estimated at ₹1.88 trillion and passenger earnings pegged at ₹92,800 crore), and the allocations towards its capex at ₹2.62 trillion. Revenue budget 2025-26 also indicates its working expenses pegged at ₹2.96 trillion and a precarious operating Ratio of 98.4 per ent. This unprecedented financial profile must also be viewed against the performance, both physical and financial, of Railways in the last “transformative” decade. 

During the decade, 2014-2024, three major reforms were undertaken in the sector: merger of the Railway Budget with the General Budget, unprecedented allocations towards its capex requirements and market-driven strategies that resulted in its outstanding traffic output and revenue generation. 

A review of Railways’ performance during 2014-2024 and its comparison with the preceding decade flags this transformative growth. Most significant is the unprecedented cumulative allocations towards its capex from gross budgetary support (GBS) at ₹8.26 trillion against ₹1.56 trillion during 2004-2014. During this period its cumulative freight loading increased to 12,660 million tonnes against 8,473 million tonnes (MT) and revenue generation increased to ₹15.86 trillion against ₹8.67 trillion. Work on the infrastructure side was also unprecedented: new tracks of 28,000 km were laid against 14,900 km; electrification of 44,000 km was done against 5,000 km; 54,000 passenger coaches, 158,000 freight wagons and 9,100 locomotives were inducted.

 

The performance of the Railways over the previous decade must also be seen in terms of the continuity of its physical and financial growth in the recent past and the challenges it faces. Although Railways’ freight loading in net terms is growing annually, the trends of last four years indicate that the incremental growth is consistently going down. Whereas net loading has gone up from 1,230 MT in 2020 -21 to 1,617 MT in 2024-25, incremental growth has consistently gone down: from 185 MT in 2021-22 to 26 MT in 2024-25. Although the passenger numbers are crawling up, (about 7,300 million in 2024-25) but these have yet to reach pre-covid levels (about 8,400 million in 2018-19). Estimated 2024-25 total revenue generation is down by around ₹11,000 crore (revised estimates). The targets (Budget estimates) for 2025-26 are however set way above the growth registered last year e.g. passenger earnings at ₹92,800 crore. This requires additional ₹17,000 crore revenue over last year which, without a major hike in fares, is unlikely to be achieved. For freight the loading targets are set at 1,702 MT, requiring three times the incremental growth of last year. Unless coal traffic grows substantially, this too is difficult to be achieved. The shortfall without cutting down on working expenses may increase the operating ratio to above 100 per cent, challenging the Railways’ financial sustainability.

 

Freight earnings sustain the Railways’ revenue budget including compensating for the losses on its passenger segment. Notwithstanding cumulative freight traffic growth during the decade, Railways’ 1,627-MT loading for the year 2024-25 is below the projected trajectory of 3,000 MT by 2027 (revised to year 2030) requiring an incremental loading of over 150 MT per annum. Freight loading is dependent on coal transportation, which is 50 per cent of Railways’ revenue and tonnage. With the emphasis on alternate sources of energy, proliferation of pit-head power houses and expansion of transmission grids, this dependence on Coal may not sustain at the present pace.

 

The passenger business segment is a study in survival of an enterprise despite ‘selling below cost’ in perpetuity. It is uniquely premised on its ‘public service obligation’ alongside its commercial transport business with a well-set mechanism of cross subsidisation. Estimated losses due to ‘below cost’ passenger fares work out to be over ₹50,000 crore annually and are compensated by freight revenues. This too presents a strong case for rationalisation of passenger fares.

 

Another business segment with tremendous potential for the Railways is its non-fare revenue (NFR) segment. The present NFR generation is below 10 per cent and must be aggressively cultivated to increase to 25 per cent.

 

Indian Railways’ working expenses are also ever growing: the salary and pension bill is over 64 per cent of its total revenues. Fuel costs, leasing charges, and maintenance of assets and infrastructure are fixed nature costs and will continue to grow with little scope for reductions.

 

Under these circumstances, Railways could well have a strong case for additional budgetary support to take care of its pensionary liabilities, passenger segment losses and the financial liabilities like the leasing charges.

 

The decade of 2014-24 witnessed unprecedented inflow of GBS for Railways’ capex. In the last two years this has increased to record levels of over ₹2.5 trillion per year, perhaps optimum for Railways. The challenge is not only to utilise this precious capital annually but to ensure that this is done with minimum cost and time overruns.

 

The way forward to overcome these challenges and to align growth with the vision of Viksit Bharat, is for Railways to reframe its strategies to increase its share in the national freight transportation by aggressive marketing and rationalisation of freight rates to match the market driven pricing. Private sector may be permitted to run more freight trains and the DFCs must put in place robust business plans and better utilisation of capacity.

 

Loss-making passenger traffic on short distances needs to be discouraged as road networks grow. Investments on new suburban rail systems must be reconsidered in view of the Metro rail proliferation. The existing railway suburban systems may be corporatised as independent cost and profit centres.

 

Above all, passenger fares must be rationalised to reach the breakeven levels by incremental fare increase over a three-year period. Non-fare revenue is targeted to reach 30 per cent share of the total revenue of railways. To deal with complicated fares and freight fixation, the setting up of a Rail Tariff Regulatory Authority may also be reconsidered.

 

Public sector undertakings under the Ministry of Railways need to be disinvested, and production units considered for conversion as central PSUs. Only those projects which provide a robust financial rate of return be undertaken and completed without cost and time overruns. At least three more DFCs will be constructed within the next five years to enable freight traffic growth.

 

Finally, to follow Prime Minister Narendra Modi’s call in 2021, that the “government has no business to be in business”, it is time for the Indian Railways to evolve coherent strategies to shed and delegate activities unrelated to its core business of transporting freight and passengers. A stronger, leaner railway network will not only be more sustainable in the long term, but it will also be better equipped to accelerate India’s economy towards the ambitions of Viksit Bharat. 

(The writer is distinguished fellow at CRF and former member traffic, Railway Board)