Quantifying the social burden on railway finances

Is the Railways a “for-profit” enterprise, or a “non-profit” one?


The correct answer is: “Both.”


There are operations of the railways which are clearly run on a for-profit basis, and there are activities which do not have a profit objective. Successive railway ministers, with Piyush Goyal being the latest, have argued that this creates a special problem when trying to assess the railways’ financial performance. The argument has merit.


Earlier this month, the Comptroller and Auditor General of India in its annual report on the Railways’ financial performance, pointed out that the Operating Ratio (OR) of the railways, a key metric of efficiency, was 98.44 per cent as of 2017-18. Put simply, the Railways spent Rs 98.44 for every Rs 100 it earned. This was the highest level in 10 years. The CAG also argued that had it not been for cash advances from two public sector units, the Railways would have been effectively in the red — it would have spent Rs 102.6 to earn Rs 100.


In his response to Parliament on the report, the railway minister made two points. First, he pointed out the effect of an additional Rs 22,000 crore hit on railway finances due to the implementation of the Seventh Central Pay Commission recommendations. Secondly, he said, the railways had undertaken to invest substantial funds in areas such as the north-east, border and hill areas and other parts of the country for connectivity and social cohesion. In such decisions, cost recovery was not the governing criteria.


Untangling the two elements (for-profit operations vs non-profit operations and services) is hardly easy.


Subsidies are offered across the railway system and are deeply embedded in its operations. These include pricing of passenger fares below cost, operation of uneconomic lines, losses on suburban services, concessions in passenger fares for special classes, essential commodities carried below cost etc. The total net impact of these social service obligations borne by Indian Railways in 2017-18 have been estimated to be around Rs 32,000 crore.


Moreover, the Seventh Central Pay Commission (CPC) recommendations with regard to pay and pension which were implemented during 2016-17 abruptly increased staff cost by 17.2 per cent, and pension expenditure by 31.8 per cent. Specifically, the alarming burgeoning of pensions requires attention. There are 1.3 million pensioners (as against 1.2 million employees!) and pension expenses have risen from 14 per cent of operating revenues (OR) in 2008-2009 to 28 per cent in 2017-2018. Beyond Pay Commission mandates, there is also increased longevity. The worry is that the pension burden may cross 40 per cent of OR in another 10 years. The Railway Board has often requested the finance ministry to contribute towards this pension burden in an effort to ease the OR.


It is politically sensitive to raise passenger fares beyond a certain point. Ultimately, the burden of profitability falls on freight which ends up subsidising passenger operations. For 2016-17, losses incurred by passenger services was almost Rs 38000 crore, just about offset by profits on freight operations of about Rs 40000 crore. But even in its freight operations, the railways charges lower freight rates than what would be warranted by a purely commercial perspective on certain essential commodities.


A NITI Aayog paper by Bibek Debroy and Kishore Desai attempted to dig further, to estimate the impact of the social service obligation on railway revenues. As of FY14-15, Debroy and Desai, estimate that the total loss incurred by the railways (around Rs 33,000 crore) amount to 67 per cent of total passenger revenues for the year. Around 77-80 per cent of these losses arise from various classes of passenger fares in non-suburban services. Losses on suburban train services (e.g. local train services in Mumbai), account for another 12-13 per cent of losses. Even AC1, whose fares are sometimes comparable to plane fares, runs at a loss.


There are flaws in this approach toward profitability estimation, as the report’s authors themselves point out. This approach assumes that all the difference between cost and revenue in a line of business is attributable to social service obligations rather than other reasons such as operational inefficiencies. Further, the logical conclusion from such an approach would be for the railways to raise fares to match unit costs for each passenger class till the loss was wiped out. In practice, this is hardly feasible, even without the political sensitivities involved.


What then is the bottomline?


It is certainly a discussion worth having, as to the extent to which the railways should be judged on pure profitability criteria, given that it does have social service obligations. However, it is also true that there is a substantial component of costs attributable to inefficiencies. A focus on the former should not obscure attempts by the railways to focus on the latter and do what it can to manage losses under its control.


However, the time has come to segregate the OR into two segments, Commercial Operating Ratio (COR) and Social Obligation Ratio (SOR). A deep-dive on railways’ finances is necessary to objectively assess this.


And it is also important for the people of India to be made aware of the cost of the social obligations that Indian Railways discharges on its behalf.

 The author is the chairman of Feedback Infra

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