An analyst with a Mumbai-based brokerage points out that the Railways has fallen short of its revenue target which was set at about Rs 1,80,000 crore in FY16

New Delhi: It is quite evident from the financial mess in the Railways that it needs to bump up passenger fares and reports suggest this year, there could be 10-15% increase. The Railways has been unable to meet its revenue targets for FY16 as it is. Whether this quantum of passenger fare hike is enough is one question but will it pass political muster is a bigger one.

In this cacophony over a possible hike in passenger fares, which will most likely not be able to bridge the expected revenue shortfall, what most of us seem to miss is that the Railways may actually need to rejig freight rates in select categories to retain the fleeing freight customers. Freight accounts for almost two-thirds of the Railways’ earnings and has typically subsidized passengers.

And since freight rates have risen much more than passenger fares without simultaneous improvement in freight carriage, the freight customers have fled to roads. Dealing a double whammy to the Railways. Not only do freight rates need to be rationalised, the Railways also needs to focus on non-bulk freight to raise revenues.

Anyway, given the politics surrounding the entire budget exercise in India, it is quite likely that Railway Minister Suresh Prabhu may club a passenger fare hike with a modest increase in freight rates too while outlining his vision for FY17 two days from now.

An analyst with a Mumbai-based brokerage points out that the Railways has fallen short of its revenue target which was set at about Rs 1,80,000 crore in FY16 and to add to trouble, the promised surplus of about Rs 20,000 crore which was to have been generated in these 12 months could well be sacrificed at the altar of the Seventh Pay Commission payout, estimated at around Rs 35,000 crore.

This analyst said Prabhu will likely reveal all this in the revised estimates for FY16 and the promised Rs 20,000 crore surplus projected for the fiscal would be near impossible to achieve unless the Pay Commission outgo is postponed. The Railways had effected a 14 percent across-the-board hike in passenger fares in 2014 and another 10 percent increase last year.

Look at the math. Even if Prabhu manages to get a 10% increase in passenger fares and a 10% increase in freight rates through our lawmakers, it would only mean incremental revenues of about Rs 17,000 crore. The passenger segment is estimated to lose over Rs 30,000 crore in the current fiscal year due to cost under-recoveries according to this piece in Mint.

Not enough to cover the Pay Commission burden. It is therefore imperative for the Railways to not just save the passengers from a fare hike but also take drastic measures to raise its share of Railways' freight traffic besides taking many other steps to boost revenues.

A Morgan Stanley analysis found passenger fares have moved up just 28% over the last decade versus a 91% increase in freight rates, with passenger losses being compensated by squeezing the freight customers. This has caused freight to move over to truckers and also choking of internal generation of funds. An Axis Capital report on Railways notes that a 5-6% hike in passenger fares every year for the last 10 years would have garnered Rs 1.3 lakh crore versus the current passenger revenue loss of Rs 22,000 crore.

On the issue of declining freight revenues, the analyst quoted earlier said roads now carry 70% of all freight in India with Railways left to carry the remaining 30%. “This is lopsided and has happened because the Railways have a capacity constraint, it is unable to assure delivery timelines and is far more expensive than road transportation. A freight train runs at an average capacity of 25 km per hour! The Railways needs money to decongest tracks and improve its share in freight traffic”.

The Axis Capital report has suggested the Railways should increase throughput of freight trains by increasing carrying capacity per rake and ensuring faster turnaround. It also suggested that new wagons of higher axle loans (25 ton vs. 22.8 ton) will mean carrying capacity per rake up 18%; it also suggested that defunct factories be revived for maintenance resulting in faster turnaround.

The brokerage has also recommended that the share of air-conditioned passenger coaches be increased up to 25% of total production of the Railways’ coach manufacturing companies from just 10% 5 years ago.

Not just cross subsidization of passenger fares by freight, the Railways’ finances are in a mess also because of manpower issues. The current wage and pension bill accounts for 51% of the Railways’ revenues. In other words, more than 50 paise of every rupee earned goes into wage and pension payments. Axis notes that with many retirees over next 2 years, this is an opportune time for manpower rationalization but politics remains a roadblock.

According to the White Paper on Indian Railways presented last year, the number of retirees was pegged at 57,233 in FY16 with pension outgo estimated at Rs 33,546. For the next fiscal, estimated number of retirees is 57,682 with pension outgo pegged at Rs 39,417.

Suresh Prabhu needs to now not only deal with messed up Railway’s finances, he must also perform the unpleasant task of rationalizing the work force while also simultaneously persuading his colleague, Finance Minister Arun Jaitley, to offer enough Budgetary support to his ministry to make much needed investments.