Putting Railways on profit track

The Railway Budget, presented on Tuesday, estimated a loss of Rs 24,600 crore for the Railways this fiscal. This is despite the decrease in its operating ratio from the above 90 per cent levels in the last few years to the estimated 88.9 per cent for the present financial year.

What causes a loss for the Indian Railways?

A commercial entity incurs losses primarily due to the shortfall in its revenue over its expenses — the Railways’ revenue is not adequate to cover its expenses. This means that it is struggling to break even in its operations. This is possible either due to falling revenues or increasing expenses. In this context, let us look at the revenue model of the Railways.

The Prescription

From the above table,As per the revised estimate (RE) for 2012-13, the Railways generates 68.42 per cent of its total revenue from the goods/cargo segment and 25.87 per cent from the passenger segment. The remaining 5.71 per cent comes from other services such as advertisement, rental and other activities. If we break up the revenue from the passenger segment, around one-fourth of the total passenger revenue comes from the upper-class passenger services (First class and AC coaches) and three-fourths from the lower-class passenger services (Table 1).

Budget Proposal

It is, thus, clear that majority of the Railways’ revenue is generated from the goods transportation/cargo handling. However, the entity is incurring losses, though the year-wise freight and passengers’ volume shows an increasing trend. The operating ratio (measured by dividing the operating expenses by the revenue generated in a year) actually comes down to 88.8 per cent in FY 2012-13 from 94.9 per cent in FY 2011-12. This clearly indicates that the Railways can come out of the loss zone by increasing the topline, that is the revenue from both the goods and passengers segment.

The Rail Budget proposes to reduce the revenue shortfall by increasing the freight charges by 5.8 per cent and the reservation fee; supplementary charges for super-fast trains, charges for tatkal bookings and cancellation charges for the passengers across different classes of service offered by the Railways (Table 2).

It is clear from the table that the Budget proposes to increase the supplementary charges for superfast trains and cancellation charges across different classes of service by a uniform rate of 50 per cent. Tatkal charges are proposed to be increased by 0, 20, 25 and 50 per cent for the second, sleeper, AC 3 Tier and AC 2 Tier passengers, respectively. The reservation fee is proposed to be increased by 0, 60, 100 and 71.43 per cent for second, sleeper, AC 3 Tier, AC 2 Tier and AC First class passengers. Though the Budget proposal to increase the revenue by hiking the charges is in the right direction, it fails to provide a logical solution to the loss-making entity.

Revenue model

It is being argued that the Railways should not increase fares indiscriminately (for all class of passengers) as that would impose a huge burden on the aam aadmi. In line with this, the Budget has left the fares, charges and fees levied on the second- and sleeper-class passengers unchanged. This means that the Railways should follow a revenue model, where the revenue loss incurred from subsidising fares for the sleeper- and second-class passengers must be compensated by charging a higher fare for the upper-class passengers (AC).

If this has to happen, the Railways must increase the proposed reservation fee, supplementary charges for super-fast trains; tatkal charges and the cancellation charges for the passengers of AC first, AC second and AC 3-tier classes, at a much higher level than is currently proposed. This cross-subsidisation is essential due to the mix of passenger segments of the Railways. Further, leading social entrepreneurial organisations such as Aravind Eye Hospital follow the same kind of revenue model, wherein the affluent customers bear the cost of the poor customers.

If one makes a comparison of the AC 2 and 3-tier charges with that of the lowest flight fares, it is apparently clear that the difference between these two alternative modes of transportation is in the range of Rs 900-2000 depending upon the places of travel.

Tight planning

Hence, the Railways should increase the charges for the upper-class segments by a suitable per cent of the basic fare (say, for instance, 10 per cent for AC 3-tier and AC chair car, 15 per cent for AC 2-tier and 20 per cent for AC first class). Though the operating ratio of the Railways is coming down in the present financial year compared to that of the previous years, it is not a cause for euphoria.

All the operating expenses except staff salary and unavoidable items should be reduced to the maximum possible extent by tight planning and monitoring measures. For instance, it is possible to introduce variance analysis on all items of discretionary cost, so that the Railways can save to the maximum possible extent.

It is certainly possible to turn around the Railways from its present loss-making status to a profit-making one. This transition requires increasing the fares and charges in the upper-class segment while, at the same time, delivering the service with zero additional charges to the sleeper and second-class passengers, besides monitoring the expenses on a high priority basis.

This will make the behemoth self-dependent and competitive and, thereby, manage its financial and operational requirements in a sustainable manner. Finally, every rupee saved by loss-making government owned entities, if accumulated, can offer sizeable funds required for the needy sectors such as health, education and infrastructure.

(The authors teach at IIM Ranchi.)

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