On Indian Railways’ Finances – For a railway business plan

Source: This post on Indian Railways’ Finances has been created based on the article “For a railway business plan” published in “Business Standard” on 25th November 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Infrastructure: Railways.

News: This article discusses the reasons for the poor revenue of Indian Railways and its various outcomes.

Indian Railways loses money on the bulk of its passenger services. According to the Railways’ method of accounting, it loses a rupee for every rupee it gets from passengers.

What is the distribution of Indian Railways’ revenue?

1. Earnings from goods traffic: Out of Indian Railways’ ₹2.4 lakh crore revenue that it earned in the financial year 2022-23, the freight revenue was ₹1.62 lakh crore (~67.5%).
2. Earnings from passenger traffic: Its passenger revenue reached ₹63,300 crore in 2022-23 (~26%).
3. Other earnings: These include earnings from charges from retiring rooms and rest houses, rent from land leasing, bridge tolls, receipts from catering department, etc.

How does Railways try to increase its revenue from the passenger segment?

According to the author, Indian Railways increases fares through tricks such as:

1. Reclassifying a train from express to superfast (for which the fare is higher)
2. Reducing the number of coaches for cheaper classes of travel and providing more coaches for higher categories.

What are the outcomes of the Railways’ poor revenue from the passenger segment?

Increase in Freight Charges: To offset the losses on its passenger service, Railways pushes up freight rates for goods transport (Cross-Subsidization Policy). This is why Railways has lost out on goods traffic to roadways. Railways accounts for only a quarter of the total goods traffic and is restricted to mostly bulk items like coal and iron ore.

Investment fuelled by Debt: With expenditure almost equal to the annual revenue, most of the massive investments being done has necessarily been funded by borrowings and increasingly through support from the Budget. This adversely impacts the government’s fiscal position and pushes the burden on the public.

Lack of Expansion in the Passenger Segment: Railways has no financial incentive to increase passenger transport (since it loses money in this segment). Freight traffic has grown 40 per cent in a decade, while passenger traffic has been static.

The situation is further aggravated due to a growing pension bill. With revenues not growing as much as required, the pension bill (increasing due to periodic Pay Commissions) is eating up 23% of its revenue.

This has necessitated the requirement of a new business plan for Indian Railways, with a new pricing plan.

Question for practice:

Indian Railways’s policy of cross-subsidisation has hampered its growth prospects. Discuss.