Skewed policies on fares mar railway finances

The Narendra Modi government has been at pains to explain the numerous initiatives it has undertaken to improve the Indian Railways (IR). It has been talking of doubling the capital expenditure to Rs 5.1 lakh crore during the last five years, accelerating the average pace of commissioning of new lines, preparing to unveil the dedicated freight corridor and several other achievements.

On its part, the IR has also taken numerous initiatives to redevelop stations, improve passenger amenities and overhaul the ticketing system in these five years. But the IR’s financial performance shows little signs of improvement. It remains a loss-making behemoth, not earning enough from carrying freight, subsidising passengers as fare hikes remain a political hot potato, and being pressured to borrow more to fulfil ambitious capex targets.

Like in at least in the previous three years, this fiscal too the IR is expected to miss its earnings target set out at the beginning of 2018-19. There was a shortfall in the revenue earned from both of IR’s main sources - passengers and freight - versus respective targets in 2015-16, 2016-17 and 2017-18.

And in FY19 too, between April and January 2019, gross earnings have failed to meet Budget Estimates (BE). The IR has already lowered its gross earnings target in the Revised Estimates (RE) for the current fiscal. Against Rs 2,00,840 crore gross traffic receipts’ target at the beginning of the fiscal, the transporter is now expected to earn only Rs 1,96,714 crore. This is a total shortfall of Rs 4,126 crore, a little over 2% from the target and an average daily shortfall of about Rs 13.5 crore.

The IR works through 17 zones spread across the country and in 2018-19, as per revised estimates, 10 of these will continue to be in the red this fiscal as their expenditure far outstrips earnings. The North Eastern Railway Zone is expected to remain the worst performer among all 17 zones, spending more than two rupees to earn every rupee.

As per the RE, the Operating Ratio (how much the IR spends to earn each rupee) for the NE zone is pegged at 208.5% this fiscal, against 179.7% targeted during budget estimates and higher than the actual operating ratio in 2017-18 which was 201.8%. Some other zones may see worsening financials compared to FY18.

It is no surprise then that for the IR as a whole too, the targeted operating ratio has slipped from 92.8% at the beginning of 2018-19 to 96.2% in RE. The transporter is eyeing 95% operating ratio for FY20 but it remains to be seen whether this will again be revised upwards.

So, the national transporter appears to be setting itself unachievable revenue targets year after year. It is pertinent to remember here that almost 66 paise of every rupee earned by the IR come from freight and carriage of goods is therefore its primary revenue earning activity.

The earnings from freight are used to subsidise passengers where the national transporter continues to bear a loss on each seat. A systematic increase in freight rates over the last few years had rendered freight carriage by the IR uncompetitive compared to other modes of transport like roadways in previous years. This meant a decline in freight earnings.

This skew was corrected in 2016-17 when freight rates were rationalised, but again, rates for some commodities were raised earlier this fiscal. Then, as we said earlier, the IR subsidises passenger travel through freight earnings and this means each passenger is being transported at a loss.

A former chairman of the Railway Board had said some days back that this ‘social service obligation’ of the IR is upwards of Rs 40,000 crore each year – this is the amount by which passenger fares are subsidised. Inability to raise passenger fares and making freight rates uncompetitive add to the IR’s financial woes and raising passenger fares is an obvious remedy

But missed earnings are not only due to skewed policies on passenger and freight fares. On other heads too, the IR has been faring poorly. The latest data show ‘Sundry’ earnings were less than half the target between April and January. This refers to earnings from non-fare revenue sources like advertisements.

Losing money

So not only is the IR unable to harness its massive potential to haul freight, it has been losing money on each passenger it transports. And given the fact that this is an election year, there is little likelihood of any increase in passenger fares.

In fact, instead of raising passenger fares, the IR has recently diluted what it calls the ‘’flexi-fare’ policy which was launched a year-and-a-half back. This happened due to continuous protests from Members of Parliament and the travelling public, who found the fares too high and the IR itself found traffic thinning on trains where this fare policy was in force.

It is another matter that this flexi-fare scheme was applicable to less than 2% trains on the IR’s network. The flexi scheme envisaged fares rising by a previously set formula with each 10% block of seats getting booked on select trains. Between April and November this year, almost Rs 600 crore incremental earnings were generated by the IR through this flexi-fare scheme.

Anyway, as per latest earnings data, passenger earnings were short of BE by about Rs 691 crore between April and January this fiscal. And total earnings (including from passengers, freight, other coaching etc) were short by a whopping Rs 4,857 crore versus the BE. This comes to a shortfall in total earnings at about Rs 16 crore on an average each day between April and January.

If passenger fares won’t be raised and additional freight (except coal) won’t choose IR for intra-country travel and the IR simultaneously lags in generating non-fare revenue, then the transporter will likely continue to remain in a precarious financial state.

(The author is a senior journalist who writes on business and economy)