The Comptroller and Auditor General of India has come out with a report on the revenue and expense of the Indian Railways. The CAG tabled this report with the Parliament, and highlighted that the Railways should revise their fares.
The report says the Railways incurred a whopping Rs 36286.33 crore loss, with most of the losses being attributed to heavily subsidised passenger fares in the period 2015-16.
"The Railways Ministry needs to revisit the passenger and other coaching tariffs so as to recover the cost of operations in a phased manner and reduce its losses in its core activities," the report said.
According to the CAG report, the overall revenue increased by 4.57%, but it remained lower than the CAGR (Compounded Annual Growth Rate) of nearly 15% recorded during 2011-15.
The CAG came down heavily on the Railways for setting improper fares. The report said, "The fixation of passenger fare and freight charges should be based on the cost involved so that it brings both rationality and flexibility in pricing considering the financial health of the railways and the current market scenario."
The report conceded that there is no "justification for not fully recovering the cost of passenger services in case of AC 1st Class, First Class and AC 2-Tier".
In case you are among those crores commuting on concessional fares, the CAG has called for scaling them down. "Since one of the factors for non- recovery of full cost from these classes could be issue of free and concessional fare passes/tickets to various beneficiaries in good numbers, this practice needs to be scaled down," the report said.
Yes people often travel dangerously. Not because the tickets are expensive, but for want of space inside overflowing coaches. Should Railways still look at Profits?
The CAG found that the operating ratio was higher and meant lower earnings for the Railways. The operating ratio is a margin of expenses to the earnings. From a ratio of 90.49 in 2015-16, the margin has come down to 96.50 in 2016-17.
"The railways incurred excess expenditure of Rs 33.13 crore during the year 2016-17. The excess expenditure does not augur well for fiscal prudence besides undermining parliamentary control," CAG said.
Surprisingly though, the freight services arm of the Indian Railways made a profit. of Rs 42,426.63 crore during 2015-16. The report says that 85.53% of the profit from freight traffic was utilised to compensate the loss on operation of passenger and other coaching services.
This is not the first time that the Railways have been blamed of their social service orientation. Cheaper fares may be the hope for nearly crores of Indians to commute distant places. But, it has always remained as a drag on the sheets of Railways. The Niti Aayog, the government's think tank too had similar thoughts.
This is the number of train ticket buyers in Mumbai alone. But still no profits?
Impact of Social Obligations
A report on the website of Niti Aayog suggests that "social service" orientation of the Railways impacted its revenue.
"The underlying reasons often cited for such losses by IR include charging fares well below IR’s costs across all classes (possible exception being AC 3 class), granting a range of concessions to various categories of passengers (senior citizens, war widows, students, national sports awardees etc.), continued operations of uneconomic branch lines etc. IR also incurs some loss in the form of revenue foregone for its goods (freight transport) business. The Explanatory Memorandum to the Railway Budget generally includes a statement of revenue foregone due to concessional freight tariffs for certain commodities. However, at an overall business level, the goods business makes profits and ultimately ends up cross-subsidizing losses of passenger business," reads the report.
The Niti Aayog's report cites the social service orientation by quoting former Prime Minister Lal Bahadur Shastri. Shastri while delivering the Budget speech for 1955-56 said, "We have been following in recent years a liberal policy .of giving concessions, particularly in connection with travel for educational purposes and other nation building activities. The financial effect of these concessions is partially reflected in the fact that the average amount earned per passenger during 1953-54 has decreased from 5.22 pies to 5.17 pies per mile."
The report finds the following service obligations as a drag on the Railways revenue:
- Non-Suburban Passenger Services: Concessions to various categories of passengers. Categories of passengers given concessions in fares are Senior citizens, Students, Recipients of gallantry awards, National Sports awards, Participants of National and State sports tournaments, Shram awardees, War widows, Patients suffering from cancer, TB, other serious diseases, Handicapped persons, Press correspondents, etc
- Sub-urban Passenger Services: Fares of various classes of tickets lower than system costs, and season ticket concessions to suburban passengers.
- Goods Services: Carriage of essential commodities at concessional rates. Concessions to Postal traffic, military traffic, registered newspapers & magazines, North East etc.
- Uneconomic Branch lines: Continued operations of uneconomic branch lines.
The 7th pay commission and social burden led to the operating margin declining to a lowest in 16 years in 2015. Suresh Prabhu, the former minister for Railways, was pressed to find out alternative measures to improve revenues of the railways. The ministry in 2015, sought the assistance of National Institute of Public Finance and Policy and the Niti Aayog to envision revenue-generating areas.
The Niti Aayog reported that the Indian Railways, based on its 2014-15 balance sheet, expends Rs 1.67 for every Rupee earned in passenger business.
Loss for running second-class services stands at Rs 11094 crores, and the Railway board suggests not to consider sundry revenues and expenses.
What does it imply?
The Niti Aayog from its report called for a revision of fares for various classes. It compared the fares of Railways with that of other travel routes. Thankfully it kept airlines as a mode of travelling out of its computation. But it compared tariff levels with AC bus services to arrive at a comparable fare rate. Information from domains like makemytrip.com, and RedBus.in were used to compute indicative fares of the Indian Railways.
Here are the indicative fares:
The Niti Aayog believes that using these rates would help the Railways recover 60% of under-recoveries in Sleeper Class / Non-Ac, and nearly 99% in 2nd Class or Ordinary class.
The Aayog in its footnote calls the report as an "indicative commentary". The Aayog's recent report on the Railways is on accounting reforms. It says nothing on tariffs and fares. Would it be wise to assume that the Aayog is taking time to study on the implications of its study, especially with elections close on heels.
It will be wiser to ignore the political context. But from a macroeconomic perspective, 2018 has already seen major ill- rising petrol costs, escalating provisioning for bad loans and NPAs (Non performing Assets), Scams- Nirav Modi, Rotomac etc, and concerns on 7th Pay Commission. With most PSUs bleeding in the red, a liquidity crunch in the market, the government may be forced to plug leakages- majorly subsidies.
And this could likely impact your travel costs on the Indian Railways.
Do you believe the Indian Railways should focus more on profits, and shed its social image? Do share this story and drop in your comments.