Operation ratio of 109% or spending ₹109 to earn ₹100, was cause for concern.

The Indian Railways is mulling a new metric to measures its performance at a time when it is staring at a five-year low operating ratio by the end of this financial year.

The Railways formed a committee of executive directors from its budget, finance efficiency and research departments, last week to look at some of the best corporate practice and suggest a new financial ratio.

The financial performance of the Indian Railways is measured in operating ratio which is expected to be at a five-year high of 94.9% in 2016-17. Till December this year, the Railways’ operating ratio in 2016-17 stood at 109% which is expected to improve by March this year. This means, the Railways spent ₹109 to earn ₹100 from April-December 2016. A lower operating ratio means better efficiency.

Financial health

“A committee has been formed to work out another index, looking at both the government and the private sector, which reflects the financial health of the Indian Railways,”a senior Railway Ministry official said. “The operating ratio reflects the true reflection of the Railways’ finances only by the end of the financial year. So, we have asked the committee to work out a better financial ratio than the operating ratio reflecting the correct financial and professional health.”

Another Ministry official said the committee has been asked to submit its report within a month, adding that it may also hire a private agency to take help in mulling a new performance indicator.

“The operating ratio is a very different way of measuring the financial health and is not the industry-standard. In the corporate sector, you have various ways of measuring a company’s operating performance such as the Earnings before interest, tax, depreciation and amortization (EBITDA). So, we need a new metric for the right comparison,” a third Railway Ministry official said.

Pay increases

The Railways’ finances took a hit this financial year due to the Seventh Pay Commission’s pay hike recommendations, Railway Ministry officials said.

“There was a hit of ₹30,000 crore on our finances due to the Seventh Pay Commission. When the last two Pay Commissions were implemented, the operating ratio deteriorated by 5-10%. However, this year we will be able manage an operating ratio which will be marginally higher at around 95%,” Railway Board Chairman A.K.Mital had said at a press conference on February 1 when Finance Minister Arun Jaitley presented the first general Budget incorporating the Railway Budget.

“In order to be meaningful, the (financial) ratio should be representative of the operations, be as comprehensive, as reasonably possible and least subject to arbitrariness,” a 1998 book titled ‘Readings in Indian Railway Finance’ edited by the then Rites Group General Manager K.B.Verma said.

“While the existing concept of Operating Ratio on Indian Railways more or less satisfies the first criteria, it does not meet the other two criteria. It is, therefore, not a satisfactory index of financial performance.”