Indian Railways Headed For Bankruptcy

New Delhi, Jan 11 : The Indian Railways’ great “turnaround story”, which was making waves in business schools till a few months back, now appears headed towards an ignominious end. A sharp decline in earnings and a serious escalation in expenditures are threatening to push India’s transport behemoth to near-bankruptcy.

Insiders say that so grave is the financial situation that the Railways may not be left with enough funds this year to appropriate money into two critical reserves that fund its purchase of new assets and improvements in passenger amenities — the Capital Fund and the Development Fund.

In fact, last year too, the Railways had failed to provide even a single rupee to its Capital Fund, which is used for buying new assets.

Those managing the Railways' finances, and currently engaged in preparing the forthcoming Rail Budget, are a worried lot. Top sources in Rail Bhavan say the Railways now has a net deficit of around Rs 2,500 crore. "While our expenditure has gone up by almost Rs 1,330 crore, our earnings are down by Rs 1,142 crore," says a Railway Board official.

Officials point out that the finances took a Rs 1,000 crore hit due to the two hikes in diesel prices this fiscal, while the 2 per cent hike in Dearness Allowance and the increase in number of days for the Performance Linked Bonus raised their expenditure by around Rs 400 crore. However, it is the sharp drop in freight business, almost by Rs 700 crore, that has come as the real shocker.

The Railways' operating ratio (the sum of money spent to earn a sum of Rs 100) is the best indicator of its financial health. In 2001-02, the operating ratio had reached as high as 96 per cent. But then, the Railways made dramatic improvements to bring it down to 75.9 per cent in 2007-08. In 2008-09, it again deteriorated, to 90.5 per cent, and then to 94.7 in 2009-10. This year, the operating ratio is threatening to increase well beyond 94 per cent, sources add.

It is not as if the crisis has suddenly developed. Warning bells were sounded as early as March 2010 when the then financial commissioner, Sowmya Raghavan, raised the red flag.

"If the trend of spending more and earning less continues, not only the internal generation of funds suffers but there is a very serious threat of Railways defaulting on the dividend payment liability, which all of us would like collectively to avoid and not find ourselves in. We have already scraped the bottom of the barrel and the fund balances have all been utilised. So there are no savings to meet shortfall in internal generation targets," Raghavan had told a gathering of all the general managers of the Indian Railways then.

Raghavan had further concluded that "in the final analysis the performance of the Organisation would be just at the bottom line" and that "unless we are in a position to control the Expenditure and increase the Earnings on a sustained basis, survival for the Organisation becomes a very difficult proposition".

In 2010-11, the Railways hope to earn close to Rs 94,565 crore. But after deducting its ordinary working expenses, pension liability and contribution to the Depreciation Reserve Fund (DRF), it will be left with Rs 7,465 crore.

From that money too, the Railways will have to shell out around Rs 6,600 crore to pay its annual dividend to the government of India, leaving only Rs 865 crore in its coffers (see box). The last time Indian Railways defaulted on paying the dividend was in 2001.

But in case it pays up the dividend, all the Railways will be left with would be Rs 865 crore, from where it will be required to appropriate money to the Development Fund and the Capital Fund. "The appropriations to the Development Fund and the Capital Fund would be hit this year," admits a top official in Rail Bhavan.

Sources say that it is the Miscellaneous Receipts worth Rs 2,500 crore which the ministry is banking on. "We have estimated a final excess of Rs 3,173 crore this fiscal. Of that Rs 2,800 crore will got to the Development Fund while the remaining Rs 373 crore will go to the Capital Fund," an official claimed.

However, given its current run, chances of the Railways earning an excess of Rs 3,173 crore look bleak. Last year, out of a budgeted excess of Rs 2,642 crore , it had managed to achieve only Rs 951 crore.

Source: Indian Express