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Indian Railways' profitability decreased 7.8% under Modi govt's first term

Mudit Kapoor and Udit Verma     July 5, 2019

Indian Railways reported a drop in profitability during the first 5 years of Modi govt at the centre. During Modi 1.0, Railways' profitability decreased by 7.8%. In the financial year 2017-18, the Indian Railways reported its worst ever operating ratio of 98.4, the highest ever since the year 2000-01 when it was 98.3. An operating ratio of 98.4 means the Railways spent 98.4 paise to earn Re 1 in the last financial year, implying a tiny surplus. Operating ratio is used to measure the operational efficiency of an organisation. High operating ratio means a lower profitability. Higher the operating ratio, lower the resources available for expansion, growth.

The drop in profitability is because of higher borrowings in the past to fund expansion in the first term of Modi government. It  was being funded through borrowings which included financing from banks, institutional financing, and external investments. An increased reliance on borrowings eventually worsened the financial situation of Railways.

The first half of Modi 1.0 witnessed the Railways struggling with growing staff and increasing pension costs after the execution of the Seventh Pay Commission and low earnings. The first rail budget of Modi 1.0 was presented by Sadananda Gowda  and it lacked clarity despite him pitching for FDI in Railways sector, dedicated freight corridor, a diamond quadrilateral high-speed rail network, enhanced passenger amenities and augmented cargo-carrying capacity. Gowda was substituted by Suresh Prabhu within six months. Prabhu, in his inaugural speech, talked about bringing in investments and bringing the finances of the country's biggest employer back on track. Prabhu presented a 5-year plan wherein he sought to bring Rs 8.5 lakh crore investments, a marked increase from Gowda's Rs 65,445 crore figures presented in 2014-15. However, railway finances and infrastructure investment were stuck in a vicious cycle as poor finances didn't allow for investments and low investments meant that the infrastructure and services took a major hit.


India's rail network is currently facing capacity constraints and network has already reached saturation. In the last few years, railways' transportation business has been declining, and consequently, its ability to generate its own revenue has been on a decline. A decline in the growth of internal revenue generation has meant that Railways has been funding its capital expenditure through budgetary support from the central government and borrowings. An increased reliance on borrowings could further exacerbate the financial situation of Railways.

On the other hand, Railways' expenditure on salaries has been gradually increasing with a significant jump every few years due to Pay Commission revisions. The pension bill is also expected to increase further in the coming years, as about 40% of the Railways staff was above the age of 50 years in 2016-17.

Despite the seemingly dark clouds, Union minister Piyush Goyal, in his interim budget speech, was hopeful and said that operating ratio of the railways is set to improve from 98.4 in 2017-18 to 96.2 in 2018-19 and to 95 in 2019.

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