Prudent Financial Decisions: An Urgent Need for Indian Railways

When presenting the first rail budget of the Narendra Modi government on July 8, 2014, D V Sadananda Gowda brilliantly summed up the state of Indian Railways thus:

“I would like to read a comment on Indian Railways by someone, which I chanced upon. I did not understand it till I learnt about the facts I talked about so far: ‘It is unheard of a business that has a monopoly, that has nearly 125 crore customer base, that has 100 per cent sale on advance payment; but still starved of funds.’ This, Madam Speaker, is the story of Indian Railways so far.”

Let us take a look at the state of the financials of the Indian Railways:

Year	Gross revenue receipts	Working expenses	Employees (in thousands)	wage bill in Rs crore	dividend payout to government in Rs crore	wage/cost %	dividend /revenue %
FY18	178725.3	175834.2	1271	129336.5	0	74	0
FY17	165292.2	159029.6	1309	118501.7	0	75	0
FY16	168379.6	149151.1	1330	93001.24	8723	62	5
FY15	161017.3	144178.8	1326	84759.69	9174	59	6
FY14	143213.9	131464.8	1334	75893.05	8009	58	6
FY13	126180.4	112565.2	1307	67004.42	5349	60	4
FY12	106245.3	99463.68	1306	58638.28	5656	59	5
FY11	96681.02	90334.88	1332	51776.57	4941	57	5
FY01	36010.95	34939.72	1545	18841.4	308	54	1
FY91	12451.55	11337.77	1652	5166.3	938	46	8
FY81	2703.48	2575.99	1572	1316.7	325	51	12
FY71	1006.95	862.22	1374	459.9	165	53	16
FY61	460.42	372.55	1157	205.2	56	55	12
FY51	263.3	215.74	914	113.8	33	53	12

Year	Operating Ratio %	Route km	electrified route km	Capital at charge in Rs crore	Investment in Rs crore
FY18	98.44	68442	29376	324725.64	517324.19
FY17	96.5	67368	25367	302457.78	471776.39
FY16	90.5	66687	23555	275135.23	419123.61
FY15	91.3	66030	22224	242116.97	368758.21
FY14	93.6	65808	21614	208844.28	324662.4
FY13	90.19	65436	20884	183488.08	289374.87
FY12	94.85	64600	20275	161447.97	257958.35
FY11	94.59	64460	19607	143220.57	231615.25
FY01	98.34	63028	14856	43051.88	63341.01
FY91	91.97	62367	9968	16125.8	22200.5
FY81	96.07	61240	5345	6096.3	7448.4
FY71	84.13	59790	3706	3330.3	4099.4
FY61	78.75	56247	748	1520.9	1868.6
FY51	81	53596	388	827	855.2

The above tables echo the minister’s observation. IR has been consistently spending over 90 per cent of what it earned. This left little room for investing in capital expenditure. New lines, gauge conversions, electrification, signalling, renewal of tracks, bridges, adoption of new tech,  suffered. Neglect prevented IR from providing better quality services to passengers and freight customers.

The implementation of the Seventh Pay Commission recommendations for government employees in mid-2016 added to the burden on finances. The only respite being soft fuel prices that plummeted in 2014.

However, there has been a marked change in the approach by the present government in its last term. Investments have grown a whopping 59 per cent in 4 years. Electrification is getting a leg up and so are gauge conversion and track renewal.

Here’s what the Railway Minister Piyush Goyal needs to do in the coming years to ensure that Indian Railways makes enough money to sustain itself against competition and grow.

Implement Accounting reforms: This will help IR in pricing its service offerings vis –a vis competition and substitutes, help in better decision making with respect to areas where funds are required, while identifying areas where funds are stuck.

This could mean increasing fares for lower classes of travel such as second class and sleeper class. As on date IR almost loses one rupee for every rupee it earns from the suburban railway and the season tickets fares. For example, no mode of transport ferries people at unimaginable rates at which IR does.  For example, the second class fare between CBD Belapur and Mumbai CSMT is Rs 15 for 38 kms or 39.4 paise per km. This will help in reducing the cross-subsidization burden that IR does- subsidizing passenger fares with freight earnings.

Accounting reforms will also help IR identify and unlock value from subsidiaries and generate cash to repay debt, fund capex as it will be in a better position to seek investments from the outside world.

It will also help IR to identify which activities to continue which ones to drop. For instance, IR runs several schools across the country at subsidized fees for the children of its employees. It should take a call on this line of activity and if it wishes to continue them, harmonise the board of education to CBSE pattern as these schools usually follow the respective state board syllabi based on the location.

Pensions are a big out go for IR. A thorough actuarial valuation of pension liabilities needs to be done for employees and pensioners who receive / will receive a pension from the government under the defined contribution system wherein the government pays pension post retirement in lieu of employer PF contribution. This valuation will help IR to adequately fund these liabilities as finance professionals have a propensity to under-fund these liabilities to shore up profits.

A thorough examination of IR debt profile should be done and negotiation to lower interest rates should be undertaken thereby lowering the cost of capital. IR should establish a treasury department to manage its cash, imports which entail forex outgo besides any exports of goods and services that it does.

Cash management at most of its major railway stations has been handed over to banks. This should be extended to all its stations -over 7300 in number.

Under-booking depreciation and amortization of assets, recognizing advance payments from captive PSU customers as revenue et al should be avoided.

In FY19, IR achieved a punctuality figure of 69.23 per cent as against a target of 75 per cent. The target itself is an abysmal number. This arises because IR has a monopoly and does not take into account the lateral competition it is going to face from self-driven cars, fast AC Volvo buses, short-haul flights under UDAAN scheme and even inland waterways in the future.

Sample this: IR has again set itself the same target for FY 20 and does not seem to understand that it makes Rs 34 lakh every minute across India from freight and passenger business (Total traffic receipts of Rs 189610.6 crore for FY19 divided by 365 *24 *60). Better punctuality would mean better asset utilization would result in better earnings.

Robust evaluation of projects from a socio-economic and financial feasibility point of view should be done. It is no secret that a new rail line spurs economic growth in any region. However, the selection of projects by earlier governments has been nothing but populism personified.

According to a Lok Sabha Standing Committee report of 2016 on pending rail projects- 106 out of 155 new line projects, 12 out of 42 gauge conversion projects, 102 out of 235 doubling projects and 22 out of 42 cost-sharing projects (with states) have a negative rate of return.

However, all the seven projects where the cost is being shared with the industry have a positive rate of return.