Recent talks in the media suggesting that Railways has posted its worst operating ratio in the past 16 years is a matter of great concern. In my recent speech in the Lok Sabha on Railways-Demand for Grants, I had mentioned, quoting figures, that the Railways is headed towards not only a financial crisis but a bankruptcy. And soon Railways may have to borrow money to pay salaries to its staff. The figures available publicly have almost confirmed this.
However, what the general public or stakeholders in the Railways do not know is that the operating ratio could be much worse than 96.9%. If rumours are to be believed, the actual operating ratio is more than 110. This means that one will have to invest a sum of Rs 110 to earn Rs 100.
Operating ratio could be tailor-made to a certain extent, depending on the objectivity of the Railways. I am not talking about fidgeting with accounts, but adjusting the account heads under which you want to put your expenses, so that the operating ratio will look better than what it is.
Unfortunately, the Indian Railways accounting system is not the best, as it does not follow the corporate accounting system. There is a lot of room left for adjustments, which solely depend on the Financial Commissioner, who is also a Railway Board member. The crux of the matter, however, remains that the operating ratio can be considered as a barometer of Railways’ financial health.
The operating ratio is a number derived from the ratio of working expenditure over revenue earned from traffic. Considering the performance of the Railways in the last financial year, the operation ratio is a bit hard to believe:
– Total revenue in 2016-17 undershot budget estimates by Rs 6,300 crore (4%). Total revenue in 2015-16, undershot budget estimates by Rs 16,752 crore (9%).
– The Railways surplus has also been on the decline. It declined by 27% from Rs 10,506 crore in 2015-16, to Rs 7,695 crore in 2016-17.
– In 2015-16, Railways generated most of its freight revenue from the transportation of coal (45%). The earnings from coal in revised estimates 2016-17 fell by 19% of the budgeted estimates of 2016-17.
– On top of all this, there has been a steep rise in the ordinary working expenses which, for revised estimate of 2016-17, stood at Rs 1,62,960 crore, and is budgeted at Rs 1,78,350 crore for the financial year 2017-18
So, how does one define working expenditures and under which head do you put them? Some of the major expenses which ought to be put under revenue expenditure are instead put under capital, which makes the operating ratio look better than what it really is.
Is it probable that the operating ratio could be much more than 96.9 percent? Let’s take a look how.
1. Since the merger of the budgets, Rs 10,000 crore of expenditure goes away.
2. Expenditure on works done for maintenance shifted to capital from revenue; like Depreciation Reserve Fund (DRF), Development Fund (DF) and Safety Fund, etc.
3. Track maintenance, which is under Demand No. 4 charged to Demand No.16. In other words, track renewal is not the same as track maintenance. Ethically, it cannot be charged to capital, which is Demand No.16 – DRF.
4. Work signal in yard cannot be charged to capital.
5. Heavy element of labour on track, TRD electrification, 50-60% cost of the labour shifted to Demand No. 16.
6. 100% of personnel for open line construction have gone to capital.
Normally, on an average, Rs 25, 000 crore is required for the DRF to ensure safety, which in turn becomes a revenue expenditure. This would result in the operating ratio being negatively affected, but instead only Rs 5,000 is appropriated to DRF. This means the system of old tracks, signalling or rolling stocks that need replacement is not done due to lack of depreciation funds, which explains frequent derailments that have been evident in recent times. Development funds have a similar story. On the revenue side, the percentage of growth budget estimates for 2016-17 comes to around -1.74%.
This is where the question arises: Can the Ministry of Railway miscalculate such important indicators? This has been observed repeatedly by the Comptroller and Auditor General (CAG) in its reports. The CAG report, dated November 2016, in Chapter 3 cited, “Overstatement of earnings in Profit and Loss Account resulting in surplus to the extent of Rs 402.15 crore being projected than actually earned.” The CAG report in their Annexure J and K talks about misclassification, meaning putting expenditure under the heads that it doesn’t belong to and that it is put under capital instead of revenue.
The Railways is on the verge of bankruptcy. Operating ratio, if calculated honestly, could be well over 120 or more. If we truly want the Indian railways to materialise into a modern transport system, we need to look at the numbers properly and accept reality. A large investment and deliberate efforts need to be made to overcome revenue hurdles. If this exercise is thoroughly and honestly carried out by the Railways and Finance Ministry, we can hope for the railways to add up to 2% of the GDP in the near future. The merger of two budgets is not the solution. The need of the hour is a change in the investment plans for Railways.
— The author is a former railway minister and the views expressed here are solely those of the author