New Delhi: How much does Indian Railways spend to earn every Rs100 it does in revenue?

In the nine months to December, the national transporter ran up a record-high operating ratio of 109%, meaning it spent Rs109 to generate Rs100, reflecting the competition it is facing from airlines and road transport to carry people and freight.

Operating ratio is a gauge of operational efficiency that measures expenses as a proportion of revenue.

Finance minister Arun Jaitley did not mention this key indicator of Indian Railways’ performance in the speech he made when on 1 February he presented the first general budget in 93 years that incorporated the railways budget.

To be sure, this critical parameter found mention in the 2017-18 budget’s expenditure profile. The revised estimate for Indian Railways’ operating ratio in 2016-17 is 94.9% and 94.6% is the estimate for 2017-18.

“As of now the operating ratio is around 109% but we are hopeful to close it at around 94-95% in financial year 2016-17 where our budget target was 92%," a senior railway ministry official said on condition of anonymity.

In 2015-16, the operating ratio around the end of November was 96%, but the railways managed to lower it to 92% before closing its books for that fiscal year.

For a railway operator, an operating ratio of 80 or lower is considered desirable.

The disappointing performance is being attributed to the burden of the Seventh Pay Commission’s pay hike recommendations and a fall in demand for coal freight.

“You need to look at things holistically. There are political decisions of not increasing passenger fares, ministries like defence, women and child, etc are not ready to share the subsidy burden given to their beneficiaries; and decreasing freights—all these have brought Indian Railways to this stature," the official cited above said.

Another government official, who also did not wish to be identified, confirmed that the railways’ operating ratio for the year till 31 December was around 109%. “There are legacy issues which can’t be wished away," the official added.

A railway ministry spokesperson, in an emailed response said, “The Indian Railways’ resource position has shown a downtrend during 2016-17 primarily due to drop in loading of coal, which constitutes around 50% of the freight loading, in the first six months of the fiscal, along with drop in the lead. The year also saw rise in revenue expenditure due to implementation of the 7th CPC (central pay commission) on pay and pension and increase in prices of HSD (high speed diesel) oil."

“Since the provision of earnings and expenditure is not uniform in every month/quarter, the provision of Operating Ratio (OR) is assessed on an annual basis at the time of Budget Estimates, Revised Estimates (RE) and in Actuals after the end of financial year," the spokesperson added.

Indian Railways’ operating ratio has stayed above 90% for the last few years. In 2014-15, the budgeted operating ratio was 92.5%, against which railways was able to achieve 91.3%. In 2015-16, the operating ratio was 90.5% due to savings of Rs8,720 crore.

“Nevertheless noticing the downtrend, a number of measures have been taken to improve the position both on the earnings front as well as to control expenditure. The likely outcome of the measures contemplated has been kept in view while finalizing the RE 2016-17 where the operating ratio is estimated at 94.9%," the railway ministry spokesperson added.

Rating agency Crisil Ltd paints an optimistic scenario for Indian Railways in a recent research report. As per the report, the railways’ operating ratio will improve to 89-90% by 2021, once its investments start showing results.

“Railways incidentally is facing a lot of challenges not only in terms of its operating ratios but also in terms of the competition that it faces from the road sector. So, the important thing would be how do you modernize the infrastructure in the railways, how do you improve the management of the railways, how do you bring about more transparency in their accounting system," finance secretary Ashok Lavasa at The Verdict, a conference organized by Mint and CNBC-TV18 on budget 2017.

Former railway board chairman Arunendra Kumar said typically operating ratio improves in the last quarter of a financial year.

“The last three months of the fiscal are crucial and it’s time when freight picks up pace again," Kumar said.

In budget 2017, Jaitley made a record allocation of Rs1.3 trillion for Indian Railways, with a gross budgetary support of Rs55,000 crore.

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