Indian Railways has a structural problem

Indian Railways today finds itself in financial trouble. The problem is not on account of an unexpected development in the recent past. It is structural in nature with no feasible solution in sight.

The department is in the news on account of a report of the financial audit for 2017-18 carried out by the Comptroller and Auditor General of India. This report was tabled in parliament on 2nd December.

The highlight, according to most print media reports, was an unusual financial entry which allowed Railways to register a surplus for 2017-18. An advance payment made by public sector firms NTPC and IRCON allowed the department, which follows a cash accounting system, to convert a negative balance into a surplus of Rs 1,665.61 crore.

Consequently, the operating ratio (the proportion of working expenses to gross earnings) was just a dismal 98.44% instead of a disastrous 102.66%.

An important aspect of this dismal performance is that it occurred in a year when the revenue performance was relatively good. The gross traffic receipts in 2017-18 increased by 8.13% as compared to an improvement of 0.58% in the previous year.

What dragged down the performance of railways?

It was the impact of the seventh pay commission which showed up in both the administrative and pension costs.

This however does not justify the poor performance, when measured by operating ratio.

The pay commission reports are not unexpected developments. Their impact is anticipated.

An example of a possibly unanticipated development is the extent of deterioration in the economic environment this year. The production of coal, the single most important freight revenue item for railways, in the July-September quarter declined 10.3% according to GDP data released by the statistics ministry.

The data indicates that 2019-20 will be another dismal year for railways.

One adverse impact of the persisting financial problem is that it forces railways to postpone essential expenditure.

According to CAG report, the poor financial performance is resulting in a “throw forward” of essential expenditure to renew aged assets. This is a problem which has been flagged earlier by CAG. Clearly, there is no solution in sight because it appears to be getting worse.

Therefore, the core problem is not about a disingenuous move to display a surplus in 2017-18. The core issue is that the weak financial position is pushing railways to postpone essential spending on renewing aged assets.

DISCLAIMER : Views expressed above are the author’s own.

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