20 Feb 2016 16:28 IST

What’s ailing Indian Railways?

A shift to commercial accounting will help the Railways meet its huge capital requirements

If you’re taking a 36,000-feet view, the vital statistics of the Indian Railways are awe-inspiring. With a network criss-crossing 90,000 kilometres across India, this transportation colossus ferries 9 billion passengers and a billion tonnes of freight every year. It is the fourth largest railway system in the world. Had the Indian Railways been a listed company, with revenues of ₹1,57,880 crore in 2014-15 it would have been a sure shot for the CNX Nifty basket.

But it’s when you get up close to the Indian Railways that its trouble spots become obvious. Despite the runaway demand for its services, this behemoth seems to perpetually struggle with creaking infrastructure, capital constraints and a falling market share.

So what’s ailing the Railways? With the Railway Budget round the corner, here are the key problem areas to be fixed.

Capacity constraint

There’s one problem the Indian Railways doesn’t have to deal with, and that’s a lack of demand for its services. As anyone who’s tried to book a railway ticket between any two Indian cities will tell you, the demand for railway berths far exceeds their supply on any given day. But the Railways isn’t able to cash in on this, like any private enterprise certainly would, because of its severe capacity constraints.

Just consider these numbers. In the two-and-a-half decades between 1990-91 and 2013-14 (the latest available statistics), passenger traffic handled by the Indian Railways (IR) more than doubled from 3,858 million to 8,397 million passengers. The freight it handled vaulted three-fold from 341 million tonnes to 1,095 million tonnes.

But the network of tracks managed by IR has only expanded by 5 per cent (in absolute terms) in this entire 23-year period. The number of railway stations has remained stagnant, at about 7,100, and the number of wagons it plies has actually shrunk by 30 per cent.

These figures clearly illustrate the enormous capacity constraint the Railways is labouring under. No wonder, then, that the network is congested, sluggish and short of basic amenities.

The snail-paced network expansion can be traced to two factors, One, political populism has led to successive Central governments flagging off new trains, instead of taking on the harder task of expanding the Railway network. Two, there has been chronic under-investment in infrastructure, thanks to its heavy reliance on the Centre for funds. The Railways have consistently received just 20-30 per cent of the allocations showered on the road sector in successive budgets over the past decade.

The solution to this capacity constraint is clearly to invest more in track expansion and decongestion, rather than in new trains. The Railways urgently needs to find fresh capital to decongest routes by doubling lines, laying more tracks in new regions and, lastly, upgrading its passenger amenities and station infrastructure to modern standards.

Sinking market share

The chronic lack of capacity has resulted in the Railways steadily losing customers to its rivals in the logistics sector — roads and aviation. A Morgan Stanley report (“The return of the transportation behemoth”) observes that the Indian Railways’ share in passenger transport had dropped from over 74 per cent in the 1950s to just 14 per cent by 2014 while that in freight has fallen from 86 to 36 per cent in the same period.

Its loss of market share is despite the Railways remaining an extremely economical mode of transportation. Statistics from the Ministry show that in 2014, the Indian Railways charged a mere 32 paise per km to transport passengers and ₹1.38 per km per tonne of freight it ferried.

For industrial users of Railways, a key complaint is the step-motherly treatment meted out to them vis-à-vis passengers. Though freight earnings bring in nearly 63 per cent of Railway revenues, passenger trains receive priority over goods trains on right-of-way. With successive governments keen to win brownie points from the aam aadmi, passenger fares have been constant while freight rates have spiralled up. Unreliable timings, lack of capacity and low speeds (26 km/hour on an average) have thus prompted many industrial users to shift their business to road transport.

Passengers, on their part, aren’t exactly thrilled with deteriorating amenities or the Railways’ safety record and affluent ones who can afford higher tariffs, have switched to air travel or luxury buses.

Investing in high-speed trains and building dedicated freight corridors is critical to woo industrial users back to the Railways. At the same time, it is cleaner stations, better facilities and on-time performance that can retain passengers. Both boil down to huge capital expenditure.

High costs

Despite its mammoth revenues, the Railways suffers from a chronic lack of cash. That’s largely attributable to its high-cost structure. In the absence of a full-fledged profit and loss account, profitability in any given year is measured in terms of its operating ratio. The operating ratio is the Railways’ operating expense in any given year, as a proportion of its total revenues.

In the last five years, the operating ratio has typically hovered between 91 and 95 per cent. That is, after meetings its running expenses it had only 5-9 per cent of revenues left. In the latest fiscal (2014-15) stringent cost control has curtailed this ratio to 91.3 per cent (provisional data). To improve this further, Indian Railways is in the process of cutting down on its fuel costs (through electrification and better procurement).

But staff costs continue to be the biggest bugbear. They already account for 55-60 per cent of its annual revenues and the Seventh Pay Commission payouts are likely to escalate them further. A hike in passenger fares may be the only way for the Railways to generate additional resources once these payouts become mandatory.

Unclear financial position

Lack of capital is clearly at the root of most of the woes listed above. The key grouse of successive Railway Ministers has been that the Railways is forced to pay dividends to the Centre every year, which leaves it short of resources to invest.

The Centre’s counter is that the Railways fritters away a large proportion of its revenues on consumption expenditure. What’s more, the Centre is only receiving a bare minimum return on the ₹ 2 lakh crore of capital it has historically committed to the Indian Railways.

Given this backdrop, privatising big-ticket Railway projects, by getting multilateral agencies or the Indian corporate sector to fund them is the clear way out. But here, the Railway’s archaic accounting system is a key constraint.

Like most Central undertakings, the Railways today follows the Government of India’s cash accounting system and not commercial accounting principles, to disclose its financial position. Thus, it accounts for its transactions based on cash flows and not on accrual and does not prepare either a GAAP-compliant P&L or balance sheet.

This effectively prevents private agencies from assessing the Railways’ true financial position, so that they can extend funding to it on commercial terms. The lack of project-level accounting makes it difficult to assess even if the numerous capital projects are generating a minimum RoI (return on investment).

It is to clean the books and present its true financial position that the current Railway Minister has initiated commercial accounting for this behemoth. This, it is hoped, will cut the Railways’ apron strings with the Centre and help it meet its prodigious capital requirements for the next decade, with the help of the private sector.

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