Indian Railways Needs To Shore Up Revenues By Steadily Raising Passenger Fares

Stupendous growth in non-fare revenues saved Indian Railways the blushes last fiscal since total revenues rose only marginally to Rs 165,068 crore (from Rs 163,791 crore). The overall growth was powered by a 72 per cent increase in non-fare revenue to Rs 10,181 crore in 2016-17 from Rs 5,928 crore in 2015-16. In other words, if we excluded non-fare revenue from the calculations, Indian Railways would have posted lower year-on-year total revenue last fiscal.

Non-fare revenues could come to Indian Railways’s rescue this fiscal again since it seems rather uncertain of any robust growth in earnings from its core business – carrying passengers and freight. The budget estimates for both passenger and freight earnings already factor in minimal growth and usually, by the end of the fiscal, these estimates are revised downwards. Remember, Indian Railways uses freight earnings to subsidise passengers and there has been a crying need to raise passenger fares for long. But populism has prevented any such move, resulting in a financially precarious state of affairs for the Railways.

This piece says non-fare revenue (and money from some other sources) would total Rs 20,000 crore this fiscal, even as total revenue target is being eased by about 10 per cent from budget estimates. The freight loading target will likely be missed too. Now, a Parliamentary Standing Committee has asked why there is such a tepid growth in Indian Railways’s revenues, wondering how the Railways will fund its own capex if such poor earnings growth continues.

In its seventeenth report, the Standing Committee on Railways (2017-18) has noted that in 2016-17, the total passenger earnings were revised downward from Rs 51,012 crore to Rs 48,000 crore at revised estimates stage, and the estimates for the current fiscal have been kept at Rs 50,125 crore. So already Indian Railways expects lower revenues from the passenger segment compared to the start of last fiscal.

In 2016-17, goods earnings were also revised downward, from Rs 117,932.75 crore to Rs 108,900 crore at revised estimates 2016-17, and the estimates for current fiscal are at Rs 118,156.50 crore (which the Economic Times report quoted above shows to have again been lowered). When one compares actual earnings under the two heads year on year, there is an increase, but it is obvious that Indian Railways has been unable to meet its targets set out at the beginning of each year.

Here, Indian Railways says actual earnings have risen in the last three fiscal years.

Remember, the railways budget has been merged with the union budget, so now Indian Railways must fend for itself. The need for adequacy in operational revenue is acute since the Railways gets a tiny amount from internal resources for its annual capital outlay and has to, instead, depend on the largesse of the Finance Ministry for much of its capex. Also, around 40 per cent of the Railways staff is above the age of 50 years and has to be provided pension – all of these activities need robust internal fund generation.

The Parliamentary Committee has noted that the contribution of internal resources in total capital outlay has been falling: 16.6 per cent in 2015-16, 12.16 per cent in revised estimates 2016-17 and 10.69 per cent in budget estimates 2017-18. In other words, only about 10 paise of every rupee the Railways spends on capex comes from its coffers. As per latest figures provided to this committee, net revenue target this fiscal is Rs 8,948.37 crore. Only, last fiscal, the target for net revenue had to be revised down by more than 50 per cent, largely due to negative earnings from freight traffic. At the budget estimates stage, net revenue target was Rs 18,210.64 crore, but by revised estimates stage, only Rs 7,695 crore could be earned.

Then, the Railways has set itself a target, at budget estimates stage, of gross traffic receipts in 2017-18 at Rs 188,998.37 crore. This is a healthy 9.8 per cent increase over the targeted gross receipts last fiscal. But the committee said targets for both passenger and freight earnings were breached at the ‘revised estimates’ stage last fiscal, and that there has “hardly been any growth” in earnings under either head for some years now. The committee felt that the Railways’s losing revenue on core activities “is a matter of concern for which Railways need to find a sustainable solution as early as possible.”

In a written reply, the Minister of State for Railways has said that passenger traffic grew by just 0.68 per cent between April and November in 2017.

Remember, freight accounts for 65 paise of every rupee earned by Indian Railways and freight earnings have been declining as the Railways’s freight rates remain unattractive compared to other modes of transport like roadways. Besides, bulk of the freight traffic has been restricted to 10 commodities and the basket is only now being expanded to almost 40. The standing committee quotes a Railways official as saying that freight rates are “very high”, which means freight carriage has moved to the road sector.

“Our average cost of service is Rs 0.99 per ten kilometers whereas I am charging from my users around Rs 1.60 which I use for cross-subsidising my passenger traffic where I am charging around 50 percent of cost of our service..... There is enough justification for reducing the freight charges. Today I am not able to do it because I have to match the budget and cross-subsidise the passenger traffic which are at substantially lower rate.”

The only solution to this conundrum seems to be a steady increase in passenger fares so that the cross-subsidy element is reduced. Indian Railways has been charging an over 60 per cent premium on transporting freight across its network, whereas passengers are subsidised as they are merely charged half of the cost of transporting them across the railway network.

Around 95 per cent of Indian Railways’s earnings come from freight and passenger transport; falling market share in freight transportation and gradual decline in average freight lead are principal reasons for a slowdown in growth of freight revenue in 2016-17. Due to expansion of the road sector, the Railways has also witnessed a migration of short-distance non-suburban passengers to road. Low-cost airlines are also posing steep competition to the upper-class passengers’s services. The Railways needs to get its house in order by raising passenger fares, getting its act together on freight rates, freight basket and so on, while also simultaneously tapping into sources for further increase in non-fare revenues.