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The Indian Railways’ revenue problem

  • Category
    Economy
  • Published
    3rd Nov, 2023

Context:

When examining Indian Railways' revenue shares, profitability, and the outcomes of investments, it's crucial to ensure that, unlike Air India, these investments contribute positively to its revenue.

  • While railway investments stimulate manufacturing, services, tax revenue, and job creation, safeguarding their impact on overall revenue is essential.

Introduction to Indian Railways

  • India’s railway network is one of the largest in the world. The route network of the Indian Railways is 1,23,236 kilometres long.
  • Under one administration, India’s railway network is the fourth biggest in the world and the second-largest in Asia.
  • It helps to boost the country’s economic growth and integration.

Indian Railways (IR) revenue system:

  • Indian Railways is funded by internal resources (freight and passenger income and leasing of railway land), central government budgetary assistance, and supplementary budgetary resources (mainly borrowings, institutional financing and public-private partnerships).
  • Internal income for the railways is expected to reach Rs 2,40,000 crore in 2022-23, up 19% from revised forecasts for 2021-22.
  • Revenues are expected to be 7% lower in 2021-22 than projected in the budget.
  • The Government of India owns and operates Indian Railways, a state-owned railway business.
  • It is one of the world’s major transportation and logistics hubs. Indian Railways’ earnings are separated into three categories:
    • Freight
    • Compensation for passengers
    • Earnings from the laundry
  • Sundry profits encompass all income inflows that are not related to freight or passenger business revenues, such as land leasing, brake vans, advertising revenues, and fees for different inspections and tender fees, among other things.

Challenges faced:

  • Post-merger issues: The government of India approved the merger of Railway Budget with the General Budget in 2016.
    • IR's capex surged post-budget merger, but operating ratio (expenses to receipts) showed no improvement, hindering profitability.
  • Expenditure on repayments surged to 17% of revenue receipts, highlighting a significant debt burden for IR.
  • IR's massive capex is justified as an engine for economic growth, benefiting manufacturing, services, tax revenue, and job creation.
  • IR's passenger services reported staggering losses of Rs. 68,269 crore in 2021-22, nullifying profits from freight traffic.
  • Freight volume and revenue growth lagged behind India's economic growth rate in April-July 2023, demanding an overhaul.
  • Abandoning goods and parcel division in favour of bulk and non-bulk categorization can enhance cargo movement efficiency.
  • Rail's share in transporting key commodities like coal, iron ore, and cement has declined, demanding strategic reevaluation.
  • Fluctuations in Net Tonne Kilometres (NTKM) pose challenges, with growth rates lower than road transport in recent years.
  • IR needs to re-evaluate strategies for boosting freight business, addressing revenue challenges, and regaining market share.

Suggestion for growth of Indian Railways:

  • Sustainable pricing in the future: The Indian Railways’ pricing strategy has to be revisited to make the passenger and freight divisions sustainable. Tariffs should be competitive with road transport costs.
  • Independent regulator: Creating a fair playing field for private players would need the creation of an independent regulator.
    • To achieve this goal, establishing the Rail Development Authority, which the government has already approved, must be expedited.
  • Modernisation of railways: The Bibek Debroy committee’s suggestions, such as expanding the Indian Railways manufacturing firm and corporatising essential railway activities, must be implemented.

Conclusion

The Indian Railways intends to earn more money and enhance its financial health by using existing infrastructure such as railway stations, land, lines, and advertising. This is a deviation from the organisation’s traditional strategy of increasing rates to increase revenue.

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