The Indian Railway is India’s largest employer and among the top ten employers in the world. It has differing meanings in the lives of Indians. For 25 million people, it is the mode of transport to take them to work and home. For industries that make up 1 million tonne of freight load, it means business. And for the 1.5 million employees of the railways, it is their bread and butter.
The Indian Railway currently operates on a narrow margin. The operating ratio is a company’s operating expenses as a percentage of its revenue. 75-80% is ideal for large companies. The operating ratio of the Indian Railway has been over 90% for the last 5 years, leaving a very small sum for safety and expansion. In the 2015-16 budget, Suresh Prabhu proposed to bring it down to 88.5%, the lowest operating ratio in 9 years. This is an ambitious proposal, especially since attempts to reduce the Railway’s operating ratio have failed several times in the past.
Will this initiative be successful in making the railway more financially stable? To determine this, we analyzed the Indian Railway’s 2014-15 and 2015-16 budget data to see what’s working and what isn’t working, as well as how the Railway impacts the Indian economy and even individuals on a daily basis.
Indian Railway chose not to increase passenger fares. Good news? Maybe not!
Currently, the Indian Railway earns approximately 29 paise per passenger per kilometre, whereas the costs incurred per passenger are about 53 paise per kilometre. Instead of increasing passenger fares to address this, the recent budget subsidized the problem. In other words, the Indian Railway spent Rs. 26,800 crore last fiscal year to avoid raising passenger fares.
The Indian Railway also subsidized this deficit by increasing the already-high freight rates. In fact, India has among the highest freight rates in the world. This makes transporting commodities such as cement, coal, iron, steel, bitumen and farm-produced vegetables costlier. These costs get passed on to middle and lower classes, who end up paying inflated rates for vegetables and electricity. Overall, high freight rates were calculated by Care Rating to contribute 0.4-0.5% in the general inflation.
Clearly, this is not sustainable. This deficit in the Railway budget is ultimately caused by artificially low passenger fares, so the only way to address it is to increase passenger fares. Not doing this seems more like a play of political forces than a fiscally responsible choice.
Causing a rise in inflation in an attempt to keep passenger fares low is much worse news for everyday Indians than a hike in railway ticket fares!
Indian Railway charges high freight rates? Let’s use roads instead.
Well, the story doesn’t end there. In this budget, the Indian Railway has raised freight rates around Rs. 45.70 per tonne for coal, Rs. 21 per tonne for cement, Rs. 141.5 for grains and pulses and so on. As reported by a leading cement company, it now costs an extra Rs. 5-10 to ship each bag of cement, which is a large sum of money for any manufacturer. This rate increase forces companies to use roadways for transporting their goods. Shipping heavy goods on roads has various negative impacts, such as damaged roads that increase travel time by several hours.
However, significant steps have been taken over the recent years to minimize losses and encourage freight traffic, despite increased rates. One of these is the building of the Eastern Dedicated Freight Corridor. This corridor is a 55 km stretch of railways being constructed exclusively for freight traffic. It will connect high demand areas with many power plants in UP and NCR. A seemingly small stretch of 55 km will increase traffic significantly in the power plant zones once it is completed by the end of 2015.
Initiative and impacts of the Indian Railway’s energy budget
Electrification projects, included in the recent budget, are beneficial in terms of both working efficiency and running cost. According to the GOI, every 100 route kms of electrified railway results in saving more than four million liters of diesel oil annually. This saves Rs. 2500 crores worth of foreign exchange annually for railways.
The latest development in this area is the first power purchase agreement signed between the Indian Railway and Damodar Valley Corporation. Presently the Railway buys power from state distribution utilities at average cost of Rs 6.45 a unit. Under the changed power purchase regime, it will be able to source power from power surplus states at lower per unit rates. This will raise the savings significantly as rising energy bills has been a main concern for the Railway.
The benefits of the deal do not end there. The Ministry of Power has declared the Indian Railway a deemed licensee, which means that the Railway is now free to make direct deals with power producers. As a result, many more such agreements will soon be in place. This not only beneficial for the Railway. Because the Indian Railway offers much higher per unit rates than domestic users and it has higher demands at nights (when the overall demand of power is very low), these deals are also beneficial for the power producers.
Pay for your ticket, or everyone pays a price
The recent Indian Railway budget concentrates on network de-congestion, electrification and safety, as is evident from the funds allocation. A huge budget of 8.5 lakh crores has been deemed necessary for these initiatives. Raising such an amount is a mammoth task. However, there are avoidable expenses that add to this burden.
Approximately 19 lakh people travel yearly without a ticket or with improper tickets (from 2013-14 figures). This costs over 250 crores to all the railway zones. There is a fine system in place to retrieve these losses, but this is not effective as we are well aware of. This lost money could have been used to improve operations like catering, hygiene and housekeeping, or to fund the Railways’ big decongestion, electrification and safety initiatives.
Damages of this kind are shameful and we all can play a role in reducing this burden. Do remember to raise a finger next time, when the passenger next to you is travelling without a ticket.
As the country’s largest employer, the Indian Railway’s budget decisions have a strong impact on the Indian economy. They are linked to commodity market prices, electricity tariffs, road conditions and more. Hence the healthy functioning of this giant rail system is more closely linked to our lives than we are aware.
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