Indian Railways expecting improved operating ratio despite Covid-19 impact

Rail ministry official says huge cut in expenditure offset falling passenger revenues; freight revenue seen driving improvement

The Indian Railways expects to report a better operating ratio for the fiscal year 2020-21 (FY21) in the upcoming Budget despite the Covid-19 pandemic, according to officials in the know.

“There has been a massive reduction in expenditure. So, operating ratios are expected to be better than last year,” a rail ministry official told Business Standard.

This is despite passenger revenues falling significantly during FY21 as the Covid-19 pandemic stalled most travel. The railways made gains in freight revenue, which is driving the improvement this year.

“This turnaround has been a result of extraordinary efforts on reduction in expenditure and historic results in freight performance. In fact, the Indian Railways has achieved highest-ever loading in the previous four months,” the official said.

The operating ratio — which measures expenses as a proportion of revenue — is considered the most important indicator for assessing the performance of the Railways.

After the onset of the pandemic, there were fears that lower passenger revenue and sustained fixed costs would hamper the overall performance of the Railways.

“Fixed costs form a larger proportion of expenses in railway operations as compared to variable costs, said Rajaji Meshram, partner at EY India.

“For example, if there is a railway station, whether one train goes through it or 100 trains do, certain costs will remain fixed. Same is the case with tracks, there are some costs associated with maintenance that cannot be done away with. So, fixed expenses will be incurred to maintain the 65,000 kilometres of railway network, whether trains run or not,”

This year, expenditure on traction is less by nearly Rs 11,000 crore over last year, said the Railway official quoted above.

“In this Covid-19 year, even though passenger services have been adversely impacted to unimaginable levels, the Railways has been able to absorb the shock to a great extent and hopes to ensure that it is able to meet its revised targets by March 2021.”

“Optimisation and use of modern analytics have led to rationalisation of Railway operations on all fronts. This, too, has led to savings without any reduction in volume and quality of operations,” the official added.

In 2016, the Centre merged the Railway Budget with the Union Budget, ending a 92-year-old practice of separate rail and general Budgets.

According to Meshram, the merger still leaves the Indian Railways responsible to earn revenues to manage operational costs. “The capital expenditure (capex) support comes from the Union Budget, but the operational costs (such as salaries) are to be earned by the Railways from operations,” he said.

Commenting on how railway finances have evolved after the merger, Meshram said, “The support that the Railways gets from the Budget for capex has definitely increased. Prior to 2014, this allocation used to be in the range of Rs 45,000 crore to Rs 50,000 crore. After 2014, it was increased to Rs 1 trillion, and in the last Budget, it reached Rs 1.5 trillion. This is in stark contrast to 7-8 years ago when the Railway Board would cite lack of funds for important projects.”

In addition to the gains from freight, the Indian Railways has also tapped more avenues in FY21. “Asset monetisation has been planned in consultation with other stakeholders. Ashok Vihar land in Delhi has been given on lease of 99 years at Rs 1,359 crore, of which first installment of Rs 203.85 crore has been received,” the ministry official said.