The Data Point titled, “AC coaches rise at the cost of Sleeper and Second Class” published on November 22, 2023 argued that commuters may find it tough to get Sleeper and Second Class seats as they are being replaced with AC coaches. Also, given the wide gulf between ticket prices of the Sleeper and AC coaches, commuters may be forced to spend more, the article said. The arguments were made from the angle of the commuter.
On the other hand, why the Indian Railways is pushing for higher-priced AC coaches, a move that may hinder its social service obligations, merits discussion. The Indian Railways is in a tough spot financially. Unlike private concerns, the Railways cannot shy away from plying trains in uneconomic lines, nor can they increase the fare of the cheapest class too high.
Due to that the revenue generation from internal resources — such as ticket sales — made by Railways is dwindling at a faster pace. The internal revenue, which was already at a sticky wicket, was scarred further by the COVID-19 pandemic.
Chart 1 | The chart shows the Operating Ratio (OR) of the Indian Railways. It measures the amount spent to earn ₹100 by Railways.
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In FY15 and FY16, the OR was around ₹90. It increased to ₹98 in the following years, only to rise to ₹107 in FY22. That meant, in FY22, the Railways spent ₹107 to earn ₹100. While this may come down again after the pandemic impact wears off, the pre-COVID figures were not impressive either.
Table 2 | The table shows operational profits/losses incurred by the Railways in ₹ crore.
The reason for such a high OR lies in the high losses incurred by the Railways while operating various classes of passenger service. A negative figure in Table 2 points to losses incurred in ₹ crore, a positive figure corresponds to profits. All the classes recorded losses in the past two years. While this was due to the pandemic, even in the years before, AC 3-tier was the only class which made consistent profits. Also, the losses were progressively widening in successive years (even before the pandemic).
This validates the Railways’ recent experimentation with more AC 3-tier coaches. Railway Ministry’s answers in the Lok Sabha for multiple questions regarding the reduction of Sleeper coaches show that the addition of AC coaches is seen as a way to “garner additional revenue” or to at least mitigate losses.
Chart 3 | The chart shows the % composition of the Revenue Expenditure (money spent on salaries, pension, fuel, etc.)
The Railways is also facing a crisis on the expenditure front. Due to the implementation of recommendations of 7th Central Pay Commission, the share of salaries and pensions spiked in recent years. The share of pension and staff costs combined increased from 60% to 69% between FY15 and FY22. Following this, due to COVID, the internal revenue generation was also hindered.
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Poor revenue generation meant the Railways had to rely on extra-budgetary resources such as funds from LIC and market borrowings to fund their capital expenditure (like new tracks and new trains).
Chart 4 | The chart shows the share of internal revenue, extra-budgetary resources (EBR) and gross budgetary support from the government (GBS) in the total revenue receipts of the Railways.
The share of internal resources in the total revenue receipts of the Railways fell from 79% in FY15 to 48% in FY21, while reliance on EBS to raise funds rose from 5% to 42%. In FY22, due to record budget allocation for Railways, the GBS share increased again, slightly reducing dependency on EBS, but share from internal resources stayed put. A high dependency on market borrowings meant increasing interest and principal payments which would further hurt the finances.
Source: Reports of the Comptroller and Auditor General of India on Indian Railway’s finances
Watch our Data video: Watch | Data Point: Why has the 3-tier AC coach been profitable for the Indian Railways?