‘Operating Ratio’ in the Indian Railways has weakened to a 16-year low.
This has significantly affected profitability and has increased financial and physical risks in the sector.
What is operating ration?
Operating Ratio is measure of profitability of a venture.
If Rs. 70 is spent to earn Rs. 100, the operating ratio is 70/100 or 70%.
Thus, the lesser the operating ratio, the better the profitability.
The operating ratio for the Indian Railways in 2016-17, has been reported as of 96.5%, which means Railways spends Rs 96.5 to earn Rs. 100.
But the CAG has flagged this as this wasn’t inclusive of pension payments, which when taken into considerations the ratio deteriorates to 99.54%.
Notably, even at 96.5%, the operating ratio was at its poorest level since 2000-01 when it was 98.34%.
What are the CAG recommendations?
Considering the financial health of Railways, CAG has pitched for revisiting (increasing) the passenger and other tariffs to reduce losses in core activities.
It argued that passenger fares and freight charges should be based on the cost involved so that it brings rationality and flexibility in pricing.
Additionally, it was noted that there was hardly any justification for not fully recovering the cost of passenger services offered in AC compartments.
Under-recovery in AC compartments is largely due to the big list of concessional travellers, and it has now been recommended to scale down the number of such beneficiaries.
What is the way ahead?
Safety Fund - Depreciation Reserve Fund, which is used to replace the over-aged assets is currently lacking
This is creating huge backlogs in replacement work, which thereby increases passenger risk, and needs to be addressed on a priority basis.
Auditing principles - There is a need to strengthen internal control mechanisms to reduce instances of misclassification of expenditure.
Unsanctioned expenditure should be controlled and the administration should ensure all unsanctioned expenditure is regularised on priority.
Further, Indian Railways should disclose significant accounting policies that involve fixed assets, depreciation and investments.
