Ways to Reform Railway Finances

UPSC Syllabus Topic: GS Paper 3 -Infrastructure: Railways.

Introduction

Indian Railways is under financial stress due to weak passenger pricing, rising costs, and dependence on freight cross-subsidy. Recent fare hikes are marginal and politically cautious. Long delays in reform have reduced revenue strength while costs continue to rise. Sustainable finances now require pricing reform, role clarity, and stronger freight and operational strategy. Ways to Reform Railway Finances.

Concerns Related to Financial Sustainability of Indian Railways

1. Concerns Related to Pricing

• Marginal fare hike: The latest fare increase ranges from less than one paisa to two paise per kilometre across classes. The estimated annual gain is about ₹1,500 crore, which is only around 1.5 per cent of the ₹92,800 crore passenger revenue target for FY26.
• Optimistic revenue claim: Indian Railways projected ₹2,400 crore from the hike, but passenger kilometre estimates show ₹1,200 crore from Mail and Express trains and ₹300 crore from Ordinary Second Class, indicating clear overestimation.
• Long fare freeze: The last major passenger fare revision occurred in 2013. Since then, political reluctance has prevented regular fare correction, weakening passenger revenue growth over time.
• Hidden financial strain: The Operating Ratio appears to be kept just below 100 because part of the pension burden is absorbed through budgetary support. At the same time, only ₹800 crore is provided for depreciation, even though investments in railway assets have exceeded ₹15 lakh crore over the last decade. This masks the true financial stress.

2. Structural and Policy Gaps Affecting Railway Finances

• Freight subsidy legacy: Since the mid-2000s, higher wagon loadability increased freight earnings and allowed passenger fares to remain unchanged. This policy masked financial stress and later became unsustainable.
• Suburban service burden: Indian Railways increasingly serves suburban and commuter traffic, which is loss-making. Such services should largely be funded and managed by State and city governments, unlike inter-city travel.
• Misplaced subsidies: AC I and AC II classes receive subsidy despite being chosen for comfort. Only AC III and Chair Car services break even, showing weak targeting of subsidies.
• Non-AC focus: Continued emphasis on non-AC coaches leads to losses. Introducing affordable AC Chair Cars with over 100 seats can shift passengers and improve revenue.

3. Operational and Service Efficiency Gaps

• Low train speeds: Passenger trains suffer from congestion and inefficient operations, keeping average speeds low despite heavy capital investment and reducing service quality.
• Excessive stoppages: Many stoppages add little value and slow services. Data analytics can help remove unnecessary halts and improve efficiency.
• Underused capacity: Well-patronised trains are not extended to 24 coaches, limiting capacity expansion even where demand is high.

4. Freight Revenue Challenges

• Revenue concentration: Freight contributes about 65% of total railway earnings. Coal alone generates nearly 50% of freight revenue. This creates high revenue concentration risk.
• Uneven zone growth: Freight revenue growth varies sharply across zones. East-Central and South-East-Central zones doubled earnings since 2015–16, while others lagged. This reflects uneven freight strategy.
• Outdated freight rates: Freight rates were last revised in November 2018. Operational costs have increased since then. This reduces competitiveness with road transport.
• Wagon shortages: Indian Railways operates 4.27 lakh wagons and inducts around 30,000 annually. Large users like NTPC report rake shortages. This shows planning gaps.
• Route congestion: Average freight speed fell to 23.8 kmph in 2024–25. Passenger train priority and infrastructure works slow freight movement. Congestion affects reliability.
• Weak terminals: Many railway yards lack modern loading and storage facilities. Poor approach roads and platforms increase logistics costs. Terminal inefficiency discourages freight users.

Initiatives Taken for the Sustainability of Indian Railways

1. Reservation system reform: Indian Railways has upgraded its reservation system with advanced anti-bot technology. A Content Delivery Network blocks ultra-fast automated bookings by rogue agents. This improves fairness and access for genuine passengers.
2. Waitlist rationalisation: Caps on waitlists have been revised to reduce uncertainty. Reservation charts are now finalised eight hours in advance. This helps passengers plan travel better.
3. Dynamic pricing use: Dynamic pricing has been introduced to align fares with demand. However, it remains limited in scope. Further refinement is required to improve revenue outcomes.
4. Fare differentiation: Differential pricing is proposed based on berth type and seat position. Upper, middle, and lower berths, as well as aisle and window seats, can be priced differently. This follows airline-style pricing without across-the-board fare hikes.
5. Train capacity expansion: Well-patronised trains can be extended up to 24 coaches. This increases capacity on high-demand routes. It improves revenue without adding new trains.
6. Freight rate review: Freight rates have not been revised since November 2018. Annual and commodity-wise assessment is recommended. This helps align rates with costs and market demand.
7. Terminal modernisation: Modern loading, unloading, and storage facilities are being promoted at railway yards. Gati Shakti Cargo Terminals with private participation support this effort. This improves freight handling efficiency and regional connectivity.
8. Freight diversification: Railways are encouraged to diversify beyond coal and iron ore. Automobiles, FMCG, and e-commerce are identified as key growth areas. This supports long-term revenue sustainability.

Conclusion:

Indian Railways’ financial stress reflects long-standing reluctance to reform passenger pricing, overreliance on freight cross-subsidy, and operational inefficiencies. Marginal fare hikes offer limited relief, while costs continue to rise. Structural distortions in service focus, subsidy design, and freight dependence weaken sustainability. Without deeper pricing reform, efficiency gains, and balanced freight strategy, financial pressures will persist.

Question for practice:

Examine the key factors contributing to the financial stress of Indian Railways and assess how recent pricing and operational measures attempt to address them.

Source: Businessline