IR Needs to Focus on Higher Internal Revenue Generation: CAG Report

On July 8, 2014, former Union Railway Minister D V Sadananda Gowda’s while presenting the railway budget in the Lok Sabha made an observation which aptly sums up Indian Railways’ financial condition.

He said “I would like to read a comment on Indian Railways by someone which I chanced upon. I did not understand it until I learnt about the facts that I talked so far”.

 “It is unheard of a business that has a monopoly, that has nearly 125 crore customer base that has 100 per cent sale on advance payment; but still starved of funds. This, Madam Speaker is the story of Indian Railways so far.”

A report by the Comptroller & Auditor General of India (CAG) on Railway Finances a couple of days ago observed the same.

Analysing the national transport behemoth’s numbers both bottom-up and top-down, the CAG concluded that Indian Railways (IR) could not have shown a surplus of earnings (of Rs 1,665.61 crore) over its expenses had it not accounted for advance payments received from NTPC and IRCON.

The CAG observed that IR would have actually booked a deficit of Rs 5,676.29 crore and an operating ratio of 102.66 per cent. Operating Ratio is the ratio of all of IR’s income to expenditure.

This meant IR would have spent 102.66 paise to generate revenue of 100 paise. The advance payment ensured that the spend seemed lesser than IR’s income. The operating ratio went down to 98.44 per cent (a 10-year low) according to CAG

YearRoute kmGross revenue receiptsWorking expensesNet revenue receipts (Total revenue receipts- total expenditure) in Rs CroreOperating Ratio %Capital at charge in Rs croreInvestment in Rs crore
FY1868442178725.3175834.2166698.44324726517324
FY1767368165292.2159029.6491396.50302458471776
FY1666687168379.6149151.11922890.50275135419124
FY1566030161017.3144178.81683891.30242117368758
FY1465808143213.9131464.81174993.60208844324662
FY1365436126180.4112565.21361590.19183488289375
FY1264600106245.399463.68678294.85161448257958
FY116446096681.0290334.88634694.59143221231615
FY016302836010.9534939.72107198.344305263341
FY916236712451.5511337.77111491.971612622201
FY81612402703.482575.9912796.0760967448
FY71597901006.95862.2214584.1333304099
FY6156247460.42372.558878.7515211869
FY5153596263.3215.744881.00827855

What the CAG Recommends:

1. Railways need to take steps to augment their internal revenues, so that dependence on gross and extra-budgetary resources is contained.

Railways received Rs 32,042.55 crore as Gross Budgetary Support (GBS) from the Government. This included Rs 5,000 crore as transfer to Rashtriya Rail Sanraksha Kosh (RRSK) – a fund created to be deployed on critical safety-related works.

IR was exempted from payment of dividend to general revenues from 2016-17 onwards with the merger of Railway Budget with the Union Budget. This reduced their revenue expenditure, the CAG observed.

IR also received Rs 11,375 crore from Central Road Fund (out of diesel cess) during the year, as a part of GBS.

Freight earnings

IR’s average lead of freight (average distance hauled by IR) in kilometres came down from 633 in FY14 to 598 in FY18, the CAG observed. Earnings from freight grew from Rs 93,905.63 crore in FY14 to Rs 1,17,055.4 crore in FY18.

The rate per tonne per km rose from 141.04 paise in FY14 to 168.93 paise in FY18.

Freight advance of Rs 5,000 crore (including GST of Rs 238.1 crore) received from National Thermal Power Corporation (NTPC) in March 2018 was booked as goods earnings for FY18, CAG observed.

The advance was towards transport of coal during FY19.This accounting treatment was justified on the ground that Government Accounts are prepared on a cash basis, CAG said adding that this was despite the IR being exempted from the payment of a dividend from 2016-17 onwards.

Unrealized Earnings

IR’s outstanding under unrealized earnings marginally reduced from Rs 1,672.26 crore in FY17 to Rs 1,664.59 crore in FY18 CAG said.

Of this, an amount of Rs 1,345.63 crore was outstanding under Traffic Suspense and Rs 318.96 crore under ‘Demand Recoverable’.

Traffic Suspense was un-recovered freight and other charges from Power Houses and state electricity boards (SEBs). Major defaulters were the SEBs of Punjab (Rs 446.95 crore), Delhi (Rs114.28 crore), Rajasthan(Rs 40.18 crore), Maharashtra(Rs 32.97 crore),UP (Rs 18.69 crore) and West Bengal (Rs 5.77 crore)

Passenger earnings

IR’s passenger earnings grew from Rs 36,532.25 crore in FY14 to Rs 48,643.14 crore in FY18. The CAG noted that IR’s average per km earning per passenger for suburban services was 15.05 paise in FY14 and increased to 18.76 paise in FY18. For non-suburban passenger traffic, it was 34.61 paise in FY14 and rose to 44.58 paise in FY18.

The average distance travelled by a suburban passenger decreased marginally from 33 to 32 km, while a non-suburban passenger’s average distance travelled rose from 258 km in FY14 to 284 km in FY18.

Cross-Subsidization of Passenger and other Coaching Services

CAG observed that IR had been using profits from freight business to cross-subsidise its losses from passenger business.

CAG said “Almost 95 per cent of this profit from freight traffic was utilized to compensate the loss of Rs 37,936.84 crore on the operation of passenger and other coaching services of IR.

IR was able to retain only five per cent of the profit on freight earnings after subsidizing the loss on passenger services in FY17. Whereas, such retention was 14.47 per cent in FY16, indicating deterioration in the operational profit.

During the five year period FY13 – FY17, IR made losses for all its classes -1st AC, 2nd AC, 3rd AC, AC Chair Car, 1st class, Sleeper class, 2nd class, Ordinary and EMU suburban. The exceptions were 3rd AC and AC Chair Car in FY17 which made a profit of Rs 1041 crore and Rs 118 crore respectively.

Concessions

CAG found that IR had forgone8.42 per cent of reserved passenger earnings towards various concessions during the last three years.

The concessions extended were on several counts and included employees, senior citizens, patients, freedom fighters, children and many more. However, 52.5 per cent of the concessions were extended to senior citizens and 37.2 per cent to IR employees.

2. Railways may ensure that surplus and Operating ratio represent a true picture of its financial performance.

IR’s net revenue surplus has been declining steadily (see table). The net surplus declined from Rs 4913.00 crore in FY17 to Rs 1,665.61 crore in FY18.

The decline during FY18 was mainly due to a negative growth rate of sundry earnings (16.20 per cent) and increase in Total Working Expenses (10.57 per cent).

Continuous decline of the net surplus is indicative of failing financial health of IR observed CAG.

Operating Ratio

Operating Ratio (OR) represents the percentage of working expenses to traffic earnings.

CAG observed that the operating ratio of IR has deteriorated steadily in the last two years and stood at 98.44 per cent in FY18, which meant that railways spent Rs 98.44 to earn Rs 100. This was primarily due to a higher growth rate of working expenses as compared to the previous year.

3. Under provisioning for depreciation is resulting in piling up of ‘throw forward’ of works concerning the renewal of over-aged assets.

Under provisioning for depreciation is resulting in piling up of ‘throw forward’ of renewal works over-aged assets estimated at Rs 1,01,194 crore, CAG observed.

This included Rs 32,975 crore on rolling stock, Rs  61,551 crore on track renewals, Rs 1,288 crore on bridge works, Rs 1,758 crore on signalling and telecommunication works and Rs  659 crore on machinery and plant. Thus, there is a huge backlog of renewal and replacement of over-aged assets, which needs to be replaced timely, for safe running of trains, CAG said.

IR appropriated only Rs 1,540 crore to its depreciation reserve fund (DRF0 as against the budgeted amount of Rs 5,000 crore for FY18. Of this, Rs 1,100 crore was transferred to RRSK for critical safety works.

Moreover, CAG added that IR was not following the formula as laid down in their Manual or any recognized formula for the computation of depreciation. In the background of depleting surplus, DRF could possibly become a liability for the Government of India.

Pension fund

Appropriation to Pension Fund is the second-largest component of revenue expenditure. It was 25.84 per cent of the total revenue expenditure in FY18, significantly higher than the average of 19.79 per cent during the past five years.

IR appropriated Rs 45,797.71 crore to the pension Fund in FY18, while only Rs 35,000 crore was appropriated last year.

The actual expenditure on pension was Rs 44,757.15 crore (for Zonal Railways) against this appropriated amount in FY18.

CAG observed that neither the estimation of pension liability was based on actuarial calculations nor was it re-assessed subsequently.

YearRoute kmEmployees (in Thousands)Wage bill in Rs croreWage / Cost Percentage
FY18684421271129336.574
FY17673681309118501.775
FY1666687133093001.2462
FY1566030132684759.6959
FY1465808133475893.0558
FY1365436130767004.4260
FY1264600130658638.2859
FY1164460133251776.5757
FY0163028154518841.454
FY916236716525166.346
FY816124015721316.751
FY71597901374459.953
FY61562471157205.255
FY5153596914113.853

In sum, the CAG recommended that IR focus on higher internal resource generation.

Recommended For You

Tell us what you think about this post!