Financial distress in Railways : Reasons and Way Forward

Synopsis: Despite several reforms, Railways is facing financial distress. This article highlights the issues and suggests solutions for financial distress in Railways.

Recent developments

• In 2016, the Railway Budget was merged with the General Budget. Earlier, Railways had a separate Budget.
• The Dedicated Freight Corridor will be operational by 2022. It includes
  • The Western Dedicated Freight Corridor (WDFC), from Uttar Pradesh to Mumbai
  • The Eastern Dedicated Freight Corridor (EDFC), Ludhiana in Punjab to Dankuni in West Bengal.
• Recently the union cabinet approved a proposal to create a single cadre for railways management. This was aimed to eliminate “departmentalism” in railways.

Why Railways is in financial distress?

• First, freight earnings are not improving despite improvement in freight load.
  • According to the CEO and Chairman of the Railway Board, the freight loading in January 2021 was the highest ever.
  • However, the freight earnings, according to the Revised Estimates for 2020-21 is ₹1,24,184.00 crore. It is lower than what was achieved in 2018-19 (₹1,27,432.72 crore).
• Second, the financial performance index i.e., the Operating Ratio (OR) (the ratio of working expenses to revenues) is not effective. (If the ratio is less than 100%, then Revenues are more than working expenses)
  • Currently, the Operating Ratio is less than 100% due to the under-provisioning of the Pension Fund for 2020-21.
  • However, the actual Operating Ratio works out to 114.19% and 131.49%, respectively, if the required provision is made for pension payments.
  • More worryingly, this is the first time ever, the Indian Railways were unable to adequately provide for the Pension Fund.

What are the future challenges that may increase the financial distress of railways?

1. First, traffic revenue is unable to keep pace with the increase in staff costs and pension payments. With the (Eighth) Pay Commission, to be scheduled in 2025-26 the working expenses of railways will further increase.
   • For example, the passenger and freight revenues increased by 84.8 % from 2010-11 to 2019-20. While the staff and pension costs almost doubled, by 157%, in the same period.
   • This is despite the fact that there is a reduction of about one lakh staff on the roll during this period.
   • The increase in the staff and pension costs is mainly due to the implementation of the Central Pay Commission recommendations.
2. Second, freight traffic is over-dependent on one commodity, coal. Almost 50% of freight earnings are contributed by the transport of coal.
   • With the increasing usage of renewable energy at competitive prices, dependence on coal will reduce. This will affect freight revenues.
3. Third, the other major challenge facing the Railways is the burgeoning staff costs including pension. In this scenario, the proposal to recruit an additional 1.5 lakh staff will further increase the financial distress.

Suggestions

1. One, increasing the revenues, particularly on the freight front, and a drastic reduction in the number of employees. In this context, the operationalization of two DFCs is significant.
2. Two, Railways need to think seriously about life after coal. Adoption of the roll-on roll-off model of transporting loaded trucks on the rail on the DFCs will reduce the overall carbon footprint.
3. Three, Corporatisation of the Railways’ Production Units and outsourcing the medical services may reduce work expenses.
4. Finally, an annual report called ‘Indian Railways Report’ on the lines of the annual Economic Survey should be placed in Parliament every year. It should detail the physical and financial performance of the Railways. It will make railways more accountable and transparent.

[Answered] Despite several measures to reduce vulnerability of climate-induced disasters, the farm sector and farmers continue to suffer losses. Discuss various reasons for this and suggest some measures.