CAG ‘exposes’ railways’ trick to hide revenue deficit

The Indian Railways includes freight advance to show an overall surplus while the reality is an overall deficit. The federal auditor found the practice was on for the last two years.

The IR has been struggling with high expenses and declining internal resource generation for several years, as passenger traffic growth got stalled and raising passenger fares remained a political hot potato.

The daily average surplus posted by the Indian Railways (IR) nearly doubled to Rs 10 crore in 2018-19, from less than Rs 5 crore in the previous fiscal. Ideally, this should have been a rare piece of good news from the national transporter, which subsidises passenger travel through freight earnings and loses money in transporting each passenger, every day. But India’s federal auditor, the Comptroller and Auditor General (CAG), has laid bare an accounting practice followed by the railways which allowed it to show a surplus when indeed, in 2018-19, it should have shown a deficit instead. The same charge was laid at the IR’s door in 2017-18 as well, when the auditor had again flagged inclusion of freight advance to show an overall surplus while the reality was an overall deficit.

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For two years, the Indian Railways (IR) has been doing this: just before a fiscal year is about to end (in March), it would take a sizeable advance payment from some customers for carrying freight in the next fiscal. While the freight against this payment was indeed carried April onwards in the subsequent fiscal year, the advance payment was included in the gross traffic earnings for the fiscal year about to end. This meant the total earnings for the year which was about to end were “dressed up” and the IR was saved from showing an overall deficit. As mentioned earlier, in 2017-18 too, the IR was able to show an overall surplus using the same tactic. At that time too, the CAG had said that there would have been an overall deficit, not a surplus, had the IR not used advance freight payment in 2017-18 earnings.

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“Audit observed that IR had received freight advance of Rs 10,000 crore during the financial year 2018-19 from NTPC in three instalments of Rs 2,000 crore, Rs 2,000 crore and Rs 6,000 crore in October 2018, January 2019 and March 2019 respectively. Further, freight advance of Rs 3,000 crore was also received from CONCOR in March 2019. Out of total freight advance of Rs 13,000 crore, Rs 8,351 crore (excluding GST) was towards transportation of goods to be carried in the ensuing financial year 2019-20. IR treated the freight advance of Rs 8,351 crore pertaining to 2019-20 as freight earnings for the year 2018-19, thereby increasing the earnings to that extent,” CAG said in its latest audit report on railway finances.

The same accounting practice was followed in the immediately previous fiscal as well, when IR received freight advance of Rs 4,761.90 crore in March 2018 from NTPC for carrying coal in 2018-19. Again, the IR had treated this sum as freight earning for the year 2017-18, the CAG said.

Operating Ratio

The IR has been struggling with high expenses and declining internal resource generation for several years, as passenger traffic growth got stalled and raising passenger fares remained a political hot potato. In the freight segment, the IR’s earlier policy of high tariffs had led to a declining share of modal transport – it was losing out to other modes of freight carriage such as roadways. Freight tariffs are now being corrected and some other parallel initiatives have helped the IR claw back some of the modal share in the overall freight carriage across the country. Whether these measures will be enough to improve their finances remains to be seen. But for the last few years, higher expenses and lower revenue generation has meant its operating ratio – how much it spends to earn each rupee – has remained dangerously high.

Taming the operating ratio seems to have been an added motivation for the IR to use advance freight earnings in precious year’s gross receipts for 2017-18 as well as 2018-19. The CAG said: “The raising of freight advance in a financial year towards traffic of ensuing year enables IR to project better operating ratio. This will result in booking of working expenses without corresponding earnings in subsequent years. This may become a vicious cycle to keep seeking increasing advances so as to maintain the operating ratio at a desired level.”

Since 2014-15, the OR has been over 90, reaching a 10-year high of 98.44 in 2017-18. Had the freight advance not been included in gross receipts in 2017-18 and 2018-19, the OR for each year would have breached 100.

Cross subsidy

The loss IR incurs on providing passenger and other coaching services has been steadily increasing over the years. In 2018-19, CAG observed that the entire profit made by the IR through freight carriage, Rs 45,923.33 crore, was utilized to compensate the loss on operation of passenger and other coaching services of IR. In the immediately previous fiscal, even freight earnings had not been able to fully cover the loss of the passenger segment, leaving a gap of Rs 101.41 crore. Nearly Rs 1800 crore was the revenue foregone in 2017-18 by the IR because of the myriad concessions it offers in the passenger segment.

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Pandemic effect

The current fiscal has spelt a death knell for IR’s finances, with operations suspended for the first time ever for nearly two months and then gradual opening up. Passenger operations are severely restricted even now, nearly six months after the nationwide lockdown began. This has meant traffic receipts have remained at a fraction of the corresponding months of last year. Latest data show that while freight earnings have been picking up since July end – due to a number of fare and other initiatives taken by the IR – they still remain about 18% down year on year.

Railway Board Chairman V K Yadav has set a stiff target of raising freight earnings in 2020-21 by 50% to tide over the drastic fall in passenger earnings during the year. Till date, passenger earnings remain lower by nearly 94% compared to H1 last fiscal. It remains to be seen whether the IR again takes advance freight payments from the likes of NTPC this fiscal as well – for one, coal loading is still lower than last year.

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