Running on borrowings, Indian Railways must get on the track

India's largest public transporter has to reform its accounting practices to determine the losses it can sustain

In 1959, John Meyer founded transport economics to study resource allocation in the sector. The field also studies the relevance of public transport and whether the sector should be run for profits.
 

Many development economists support subsidising public transport, arguing that the benefits of infrastructure and urban development outweigh the losses. The debate is about the bill for such losses. As its finances deteriorate, the Indian Railways faces a similar debate.
 

In 2015-16, Railways funded 18 per cent of its capital expenditure through internal resources. In 2021-22, internal resources will account for just 1.05 per cent of Rail­ways’ capital spending. India’s biggest public sector utility expects to raise 2.85 per cent of its capital expenditure from internal resources in 2022-23. That is a tough ask: in the last seven years, Railways has not once met its target.

In 2021-22, it planned 3.49 per cent capital funding from internal resources. So, the likelihood of making it to 2.85 per cent is low (see chart 1).

 

Railways’ subsidy burden has increased and it hasn’t been able to capitalise from sundry earnings, like revenue from leasing and advertisements.
 

The Railways’ dependence on gross budgetary support, or borrowing from the central government, has increased. From 40 per cent in 2015-16, gross budgetary support’s share in Railways capex increased to 64 per cent in 2021-22 (until January). It is expected to be 56 per cent next year.
 

The transport service can’t even fulfil its safety and track repair commitments from its own funds. The Rail Safety Fund and the Depreciation Reserve Fund (DRF) once financed such works, but after the Rashtriya Rail Sanraksha Kosh (RRSK) was introduced in 2017-18 the central government picked up the funding.

Railways was expected to contribute Rs 25,000 crore to RRSK over a five-year period, but it has funded just a fifth of that amount (see chart 2).

 

The problem is not the Railways borrowing to fund operations, but how it reflects in its calculation. The Railways calculates operating ratio to show how much it spends to earn Rs 100. In 2021-22, it is expected to spend Rs 98.9 to earn Rs 100. However, these calculations do not reflect the actual spending.

Next year, it expects to improve spending to Rs 97. However, the operating margins do not reflect the actual spending by Railways.
 

Track repairs were accounted for in the DRF and other funds, which formed a part of the operating margin calculation. After RRSK was introduced, DRF has been whittled down. Besides, Railways leaves out RRSK when it calculates operating margin. If these expenditures are accounted for, then it will end up spending more than it earns (see chart 3).
 

Railways need not turn a profit for its services, but a fair accounting would give lawmakers an idea of the quantum of losses it can sustain.