Tracking Railways´ Performance

Indian Railways has long been groaning under its own weight. How much longer will it be before the government can turn things around?

Indian Railways, or Imperium in imperio, as the giant lifeline of India is rightly called, contributes around 1 per cent to the national GDP. However, it has been growing at a meager sustainable growth rate (SGR*) of 1.69 per cent, which does not reflect the full potential of one of the largest employers of the world. The consistently loss making passenger segment, declining efficiency of the freight segment, slow economic recovery, high wage bills and slow rate of capacity augmentation due to capital deficit are the key reasons responsible for this sorry state.

The investment had been sluggish at a marginal CAGR of 12 per cent during FY10-FY14. It saw a negligible increase of 0.7 per cent in total track km and 2.4 per cent in railway electrification during this period. Rolling stock, which includes coaches and wagons, grew at CAGR of 14 per cent (FY10-FY14) which is only marginally better than the corresponding growth in total passenger km (PKM) and net tonnes km (NTKM) which grew at the rate of 6 per cent and 3 per cent respectively.

Total revenue grew at a CAGR of 12.6 per cent with corresponding operating cost growing neck to neck at 11.97 per cent, resulting in a high operating ratio averaging 93.7 per cent during FY10-FY14. 41 per cent of this operating cost includes those related to fuel, traffic and rolling stock, followed by 23 per cent for employee´s wage bill which has been growing at a CAGR of 11.4 per cent. With dividend payout ratio as high as 100 per cent (FY10), the enterprise is generally left with negligible cash that can absorb operational expenses of four days only. A below average fixed asset utilisation of 45 per cent and a low return on investment of 3.3 per cent against a high inflation scenario has given the Railways a permanent seat in the deep dungeons of enormous notional losses. However, unlike the PE investors for whom the said numbers may indicate a lacklustre performance and a deterrent to invest, government is bound by social concerns as a priority and will keep infusing funds in the Railways, even with the passenger segment making steep losses (Table-1).

The primary sources of revenues include passenger, freight, parcels and luggage. Majority of this income comes from freight (67 per cent), and perhaps, that is what is keeping the giant fish alive. In fact, passenger business has shown consistent losses and this has only been growing for the past five years at the rate of 6.5 per cent unlike the freight business whose profits grew at the rate of 9.7 per cent during the same period (Table-1). In a nutshell, the entire enterprise is thriving on cross subsidisation and exorbitant freight rates which is reflected in the slowing fare-freight ratio from 0.27x in FY10 to 0.23x in FY14 (Figure-2). That said, this charm of cross subsidisation which has now apparently become the business model of the enterprise will soon dry up if passenger business is not turned around by relevant fare hikes. A closer look at the past figures (Figure-2) indicates that these fare hikes have been disproportionate and moved slower than inflation. This is the key reason for the sorrows of the passenger business.

Undoubtedly, freight segment is the backbone of Railways´ average profitability of 8 per cent. However, the said segment displays an inherent mismatch in pricing policy and its efficiency. The spasms of increasing inefficiency in wagon turnaround time from 4.98 days in FY10 to 5.13 days in FY14 and a declining NTKM/wagon-day at a rate of 1.6 per cent are being compensated by higher freight rates growing at a CAGR of 10 per cent. Compared to other emerging economies like China and Russia, Indian freight service yields are way higher by almost 40 per cent compared to passenger service yields which are perhaps the lowest (Table-2) The passenger and freight revenues have been growing at a CAGR (FY10-FY14) of 11.7 per cent and 12.6 per cent respectively. Furthermore, passenger revenue per seat increased from Rs 52.54 in FY10 to Rs 69.31 in FY14 at a CAGR of 7.2 per cent while the freight revenue per wagon grew at 9.5 per cent. However, there has been a consistent slow-down in traffic of both the segments. This may be attributed to severe competition from roadways due to its last mile connectivity, lower rates in case of freight and the shift of middle class to low cost airlines in case of passenger traffic. That said, this traffic decline has been partially offset by rise in average trip distance from 124km (FY10) to 138km (FY14) in case of passengers and higher freight rates in case of goods. Overall, revenue per track km grew at a CAGR of 11.8 per cent between FY10-FY14 indicating better capacity utilisation, albeit slow pace of investments in tracks.

Around 50 per cent of Railways´ total funding comes from government budgetary support with internal accruals accounting for only 20 per cent.

While the ambitious investment plan of Rs 8.5 trillion for the next five years is the need of the hour, fund-raising may be a deterrant to that dream of bullet trains, electrified railways and better connectivity.

Most people may also argue in favour of privatising Indian railways, but the Indian government reads its economics through a different lens of social development. Hence, it plans to take the route of public private partnerships and viability gap funding (VGF) for around 23 projects to bring in private investment. An impetus to establish a strong bond market may be yet another route to raise funds in future. The government could also sell off-shore rupee denominated bonds after RBI allowed it in its April 7, 2015 monetary policy. However, the struggle will not end without the non-populist and politically self haemorrhaging steps to turnaround the passenger business by increasing the fares at least in proportion with inflation and improve the efficiency of freight operations.

This article is authored by Kamal Nayan Srivastava, Analyst – Infrastructure & Project Finance, India Ratings & Research (Ind-Ra).