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Indian Railways: Analysing the Budget

March 12th, 2018 No comments

Finances of the Railways were presented along with the Union Budget on February 1, 2018 (the Railways Budget was merged with the Union Budget last year).  In the current Budget Session, Lok Sabha is scheduled to discuss the allocation to the Ministry of Railways.  In light of this, we discuss Railways’ finances, and issues that the transporter has been facing with regard to financing.

What are the different sources of revenue for Railways?

Indian Railways has three primary sources of revenue: (i) its own internal resources (revenue from freight and passenger traffic, leasing of railway land, etc.), (ii) budgetary support from the central government, and (iii) extra budgetary resources (such as market borrowings, institutional financing).

Figure 1Railways’ internal revenue for 2018-19 is estimated at Rs 2,01,090 crore which is 7% higher than the revised estimates of 2017-18.  Majority of this revenue comes from traffic (both freight and passenger), and is estimated at Rs 2,00,840 crore.  In the last few years, Railways has been struggling to run its transportation business, and generate its own revenue.  The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining.  This is due to a decline in the growth of both freight and passenger traffic (see Figure 1).  Railways is also slowly losing traffic share to other modes of transport such as roads and airlines.  The share of Railways in total freight traffic has declined from 89% in 1950-51 to 30% in 2011-12.

The Committee on Restructuring Railways (2015) had observed that raising revenue for Railways is a challenge because: (i) investment is made in projects that do not have traffic and hence do not generate revenue, (ii) the efficiency improvements do not result in increasing revenue, and (iii) delays in projects results in cost escalation, which makes it difficult to recover costs.  Railways also provides passenger fares that are heavily subsidised, which results in the passenger business facing losses of around Rs 33,000 crore in a year (in 2014-15).  Passenger fares are also cross-subsidised by charging higher rates for freight.  The consequence is that freight rates have been increasing which has resulted in freight traffic moving towards roads.

Figure 2Figure 2 shows the trends in capital outlay over the last decade.  A decline in internal revenue generation has meant that Railways funds its capital expenditure through budgetary support from the central government and external borrowings.  While the support from central government has mostly remained consistent, Railways’ borrowings have been increasing.  Various committees have noted that an increased reliance on borrowings will further exacerbate the financial situation of Railways.

The total proposed capital outlay (or capital expenditure) for 2018-19 is Rs 1,48,528 crore which is a 24% increase from the 2017-18 revised estimates (Rs 1,20,000 crore).  Majority of this capital expenditure will be financed through borrowings (55%), followed by the budgetary support from the central government (37%).  Railways will fund only 8% of its capital expenditure from its own internal resources.

How can Railways raise more money?

The Committee on Restructuring Railways had suggested that Railways can raise more revenue through private participation in the following ways: (i) service and management contracts, (ii) leasing to and from the private sector, (iii) joint ventures, and (iv) private ownership.  However, private participation in Railways has been muted as compared to other sectors such as roads, and airports.

Figure 3One of the key reasons for the failure of private participation in Railways is that policy making, the regulatory function, and operations are all vested within the same organisation, that is, the Ministry of Railways.  Railways’ monopoly also discourages private sector entry into the market.  The Committee on Restructuring Railways had recommended that the three roles must be separated from each other.  It had also recommended setting up an independent regulator for the sector.  The regulator will monitor whether tariffs are market determined and competitive.

Where does Railways spend its money?

The total expenditure for 2018-19 is projected at Rs 1,88,100 crore, which is 4% higher than 2017-18.  Staff wages and pension together comprise more than half of the Railways’ expenditure.  For 2018-19, the expenditure on staff is estimated at Rs 76,452 crore.  Allocation to the Pension Fund is estimated at Rs 47,600 crore.  These constitute about 66% of the Railways’ expenditure in 2018-19.

Railways’ primary expenditure, which is towards the payment of salaries and pension, has been gradually increasing (with a jump of around 15% each year in 2016-17 and 2017-18 due to implementation of the Seventh Pay Commission recommendations).  Further, the pension bill is expected to increase further in the years to come, as about 40% of the Railways staff was above the age of 50 years in 2016-17.

The Committee on Restructuring Railways (2015) had observed that the expenditure on staff is extremely high and unmanageable.  This expense is not under the control of Railways and keeps increasing with each Pay Commission revision.  It has also been observed that employee costs (including pensions) is one of the key components that reduces Railways’ ability to generate surplus, and allocate resources towards operations.

What is the allocation towards depreciation of assets?

Railways maintains a Depreciation Reserve Fund (DRF) to finance the costs of new assets replacing the old ones.  In 2018-19, appropriation to the DRF is estimated at Rs 500 crore, 90% lower than 2017-18 (Rs 5,000 crore).  In the last few years, appropriation to the DRF has decreased significantly from Rs 7,775 crore in 2014-15 to Rs 5,000 crore last year.  Provisioning Rs 500 crore towards depreciation might be an extremely small amount considering the scale of infrastructure managed by the Indian Railways, and the requirement to replace old assets to ensure safety.

The Standing Committee on Railways (2015) had observed that appropriation to the DRF is the residual amount after appropriation to the Pension Fund, instead of the actual requirement for maintenance of assets.  Under-provisioning for the DRF has also been observed as one of the reasons behind the decline in track renewals, and procurement of wagons and coaches.

Is there any provision towards safety?

Last year, the Rashtriya Rail Sanraksha Kosh was created to provide for passenger safety.  It was to have a corpus of one lakh crore rupees over a period of five years (Rs 20,000 crore per year).  The central government was to provide a seed amount of Rs 1,000 crore, and the remaining amount would be raised by the Railways from their own revenues or other sources.

As per the revised estimates of 2017-18, no money was allocated towards this fund.  In 2018-19, Rs 5,000 crore has been allocated for it.  With the Railways struggling to meet its expenditure and declining internal revenues, it is unclear how Railways will fund the remaining amount of Rs 95,000 crore for the Rail Sanraksha Kosh.

What happened to the dividend that was waived off last year?

Railways used to pay a return on the budgetary support it received from the government every year, known as dividend.  The rate of this dividend was about 5% in 2015-16.  From 2016-17, the requirement of paying dividend was waived off.  The last dividend amount paid was Rs 8,722 crore in 2015-16.

The Standing Committee on Railways (2017) had noted that part of the benefit from dividend is being utilised to meet the shortfall in the traffic earnings of Railways.  This defeats the purpose of removing the dividend liabilities since they are not being utilised in creating assets or increasing the net revenue of Railways.

Indian Railways – where is it headed?

March 14th, 2011 No comments

The general discussion on the Railway Budget concluded in Parliament this week. During the discussion, several MPs made a reference to two important documents tabled by the Railway Minister in 2009 – the ‘White Paper’ on Indian Railways and the 2020 Vision document.

The documents provide good insight into the operational and financial performance of Railways over the previous five years. They also throw light on the challenges that confront the Railways today. It emerges that Railways has relied heavily on increasing utilization of existing assets to manage the increase in demand. The system is otherwise severely constrained by lack of adequate capacity.

Scenario so far (2004-09)

Growth in traffic and earnings

Rail transport demand is linked to the growth in GDP. As a result, the two main businesses of Railways – Passenger and Freight – have both seen significant increases in traffic in recent years.

Passenger traffic has grown at an average rate of 10% each year. Earnings have increased at a slightly higher pace, implying that most passengers have been spared increases in fare. Standalone, passenger operations have continued to be loss making. Freight traffic has grown too, but at a lower rate of about 7% and unlike the passenger segment, freight fares have increased significantly over these years.

Freight forms the backbone of Railways’ revenues. Even today, it continues to account for almost two-thirds of total earnings. However, Railways’ market share in freight has decreased steadily over the past few decades – it dropped from 90% in 1950-51 to less than 30% in 2007-08. The main reasons for this decline are high pricing (to subsidize passenger travel) and lack of sufficient infrastructure. Railways are unable to provide time-tabled freight services. In addition, there are no multi-modal logistics parks that could have provided door-to-door cargo services.

Infrastructure constraints

Since 1950-51, route-kms have increased by just 18% and track-kms by 41%, even though freight and passenger output has gone up almost 12 times. Specific issues include:

  • Common corridor for both freight and passenger traffic – With freight trains on the same corridor, operating fast passenger trains becomes extremely difficult.
  • Concentration of traffic – More than half the total traffic moves on the golden quadrilateral and its diagonals; large parts of these sections are now already saturated.
  • Limited capacity for production of rolling stock, particularly locomotives and EMUs.

The above constraints require investment in network and capacity augmentation, including dedicated freight corridors. Hence, a substantial increase in funding is necessary. The Vision 2020 document planned to deploy Rs 14 lakh crore in the next 10 years towards development of rail infrastructure.

Recent trends (as presented in the Budget 2011)

This year’s budget presented the actual financial performance in 2009-10, the provisional performance in 2010-11 and the targets for 2011-12 (Details can be accessed here). It also highlighted achievements on other metrics, including growth in traffic and augmentation of infrastructure (See ‘Status of some key projects proposed in 2010-11).

On financials, 2009-10 was a bad year for Railways. Figures show a high Operating Ratio of 95.3%. Operating Ratio is a metric that compares operating expenses to revenues. A higher ratio indicates lower ability to generate surplus. The 2009-10 Operating Ratio is the highest since 2002. According to the Railways Minister, this can be partly attributed to higher payout in salaries and pension due to implementation of Sixth Pay Commission recommendations.

Growth in passenger traffic remained high in 2010-11, at 11%. However, growth in freight traffic slowed down to 2%. Again, passenger fares remained untouched, but freight fares were increased.

Railways, in 2011-12, targets an increase of 8% in both passenger and freight traffic. Financials are expected to improve. An amount of Rs. 57,630 crore has been budgeted as net plan outlay for investment in infrastructure. Last year, this figure was Rs 41,426 crore.

In her opening remarks during the Budget speech in Parliament, the Minister commented that Railways forms an important backbone of any country. Lets hope it is headed in the right direction!