Is Indian Railways Profitable?

A couple of months ago, the government decided to privatize a total of 151 trains on 109 train routes. Now, this is a very unforeseen step taken by the government because the Indian Railways has always been a public industry and the government has never given up any of its strings to the private sector, therefore, this is making a lot of people curious. This raises an important question: Is Indian Railways profitable?

To understand the profitability of the Indian Railways, one key term is imperative to understand: Operating Ratio. Operating Ratio, in the context of Indian Railways, is the amount of money the railways need to spend to earn each rupee. It is the most basic ratio to understand the performance of the industry. So, if you hear that the operating ratio of Indian Railways is, say, 50%, It means that the government has spent Rs. 50 to earn every Rs. 100. It is a simple expenditure-revenue relationship. Similarly, if the operating ratio is 98.4%, it means the government is spending 98.4 rupees to earn 100 rupees. Simply put, a lower value is better for railways. 

indian railways: How Indian Railways' latest reform could alter ...
Source: The Economic Times

From 1951 till present, this ratio has seen a lot of variation due to several reasons like the development of alternative transport like airways and land routes, an increase in rail routes, etc. Though, one thing has remained unchanged throughout- the government’s control over the industry. Also, an increase in the number of passengers across decades has also affected the ratio substantially. Let us take a look at how the passenger traffic in the passenger trains has been till now:-

Source: Statista

As you can see, the passenger traffic has been the highest in the financial year 2019. Though this seems to be a good sign for the Industry’s performance, the complete picture says otherwise. Actually, the number of passengers traveling in the Indian Railways per year even exceeds the total population of Australia. Even then, that doesn’t mean that the industry is making money, as in order to accommodate a population this high, a lot of expenditure needs to be incurred.

Now, Let’s look at the operating ratio trajectory for the past couple of decades:-

As you can see that the Ratio was best in 2008 when it stood at 76%(means that to earn Rs. 100, the government had to spend Rs. 76). The ratio experienced a sharp rise after that year and crossed the 90% threshold. The ratio was at its worst in the Financial year 2018 when it stood at 98.4% which is right below the redline (100).

For the financial year 2019-20, the operating ratio stood at 98.41. The value of this ratio when exceeds 100, is a red signal for the government. It simply means it will be a loss-making machine. Therefore, it is quite apparent that the ratio is on the borderline of crossing the threshold. Furthermore, the national auditor in its report said that for the year 2017-18, the railways would have ended up with a negative balance of Rs. 5676.29 crore instead of a surplus of Rs. 1665.61 crore. The advance payment received from NTPC and IRCON covered up the deficit. Therefore, instead of 98.44 percent, the operating ratio would have increased to 102.66 percent. Moreover, 95% of the profit from freight was used to compensate for the loss of passenger operations and other coaching services. 

Furthermore, the operating ratio for the financial year 2018-19 stood at 97.3% which was reported largely due to its two biggest customers- NTPC and Concor.

 

Pressure of expenditure

Clearly, the Indian Railways is under a lot of pressure in terms of maintaining its Operating Ratio as the expenditure is also consistently increasing. Since 2010, the operating ratio has consistently been over 90%. The pension bill of railways has been increasing. Statistics say that approximately 40% of the railway staff was over 50 years of age in the year 2016-17. Moreover, the concessions given on traveling is also adding weight to the expenditure. In order to ease the pressure of this expenditure, the Railway Ministry in 2017 started the ‘Give it up’ scheme in which senior citizens, whose concession accounted for 52.5% of the total concessions allowed on the railway fares, can give up their concessional rights. Unfortunately, this scheme did not get a good response as out of the total senior citizen passengers, only 1.7% gave up 50% concession and 2.47% gave up 100% concession. 

Privatization: What will happen?

 

Though 151 trains on 109 routes don’t speak entirely for the whole Railways Industry, it is definitely a big move by the government in terms of its future implications. With the entry of private players, there exist a lot of possibilities related to the future of this industry. While the entry of private players might relatively improve the ‘efficiency’ of the passenger services, it might, in turn, create problems in other dimensions:-

  • One of them is further class division. According to former railway minister Dinesh Trivedi, the Railways-run trains will become “trains for the poor” and private run trains will run only for the rich.
  • The metro-man E. Sreedharan also criticized the decision. He said “Two types of fares and two types of trains will create confusion. Private players will find it difficult to work with the railways and leave it midway.
  • The Indian Railways has always been a complex industry and one of the biggest generators of employment in the country.  Being a government-industry, its employment dynamics are very different from those in private companies. Private players might not be patient in maintaining the job security of the employees as maintained by the government. 

What do you think?

 

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