Indian Railways’ operating ratio to cross 100 due to pay panel payout

By: | Published: January 12, 2016 1:16 AM

With the finance ministry expressing its inability to fund the railways' expenditure on the Seventh Pay Commission, the transporter's operating ratio — operating expenses as a proportion of revenues — is likely to exceed 100 in FY17.

Till December, the railways only generated Rs 75,222 crore of freight versus its internal target of Rs 81,073 crore. (AP)Till December, the Indian Railways only generated Rs 75,222 crore of freight versus its internal target of Rs 81,073 crore. (AP)

With the finance ministry expressing its inability to fund the railways’ expenditure on the Seventh Pay Commission, the transporter’s operating ratio — operating expenses as a proportion of revenues — is likely to exceed 100 in FY17. In one stroke, that wipes out the gains made by the railways in FY16, and leaves its finances looking quite precarious, much like they did after the Sixth Pay Commission.

Thanks to a sluggish economy, revenue growth in FY16, in any case, is going to be much lower than the budgeted 15%. Till December, the railways only generated Rs 75,222 crore of freight versus its internal target of Rs 81,073 crore. On the passenger front, it managed to generate Rs 26,031 crore up to October, 10% below its internal target of Rs 29,016 crore. Given the best months for freight traffic are December and January, the ministry is looking at a 9-10% growth for the year, taking the likely revenue to around R1.74 lakh crore compared to the budgeted R1.84 lakh crore.

What will help, though, is the sharp slowing in expenses this year, mostly due to the fall in prices of diesel as well as the new power purchase agreements that the railways has entered into to replace existing ones. Compared to an 11% growth budgeted for in FY16, railway ministry sources are confident growth in expenses can be contained at around 4-5%. In which case, the operating ratio for FY16 may not be very different from that budgeted for.

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The railways’ real challenge will come in FY17. While the diesel bonanza is near and end, more power purchase agreements are expected to lower fuel costs. While railway minister Suresh Prabhu has asked the Railway Board to look at efficiency gains that could keep growth in FY17 expenses flat, or very low, even this will not be enough. Even if other expenses remain flat — a very big assumption — the railways will have to spend an additional Rs 40,000 crore due to the pay commission in FY17, after taking into account the arrears from January to March 2016.

If zero growth in expenses — apart from those relating to the pay panel — is assumed for FY17, that still takes the railways’ operating expenses for the year to Rs 1.94 lakh crore.

Given a revenue growth in FY17 that is similar to that in FY16, the railways will earn Rs 1.89 lakh crore and has to finance expenses worth Rs 1.94 lakh crore — an operating ratio of over 100%.

If the railway minister Prabhu is able to get the Railways Regulatory Authority Bill through and set up a regulator in time, he could try and get the finance ministry to foot some of the Rs 30,000 crore he spends each year on subsidies in the passenger segment.

Getting more non-fare revenue — from advertising, for instance — is another priority area for the railways, though the progress on this has been slow.

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