Record budget, but railways' finances weighed down by big pension burden

The central government’s push to boost infrastructure allocations in the Union Budget for FY22 has meant a substantial mark-up in budgetary allocation for the Indian Railways. The national transporter has received the “highest-ever” sum of ₹1.1 lakh crore in the budget, of which ₹1.07 lakh crore is slated for capital expenditure. This much-awaited enhanced capex will go to build new lines, double and triple existing ones, electrify the railway network, improve and modernise its signalling and communication networks and complete other works.

But, in this din over increasing infra spends and expansion of the railway network, two key elements are being overlooked. One is the prolonged weak overall financial position of the Indian Railways, as rising staff costs play havoc. Second is the fact that it is unable to deploy the total capex budgeted for each fiscal year because, apart from budgetary support, a large part must come from internal resources and market borrowings and the transporter is unable to adequately generate either.

First, the staff costs. The biggest drain on the earnings of India’s single largest employer is rising staff costs — on salaries and pensions. It has about 12.5 lakh employees and 15.5 lakh former railway employees. The pension cost itself works out to be more than ₹50,000 crore every year, which is about 25% of the railway’s earnings, the former Chairman of the Railway Board, V K Yadav had once said. While according to an analysis by the PRS Legislative, staff wages and pension together account for nearly two-thirds of railways’ total expenditure.

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To make matters worse, internal resource generation has been shrinking as well and the transporter is not inclined towards increasing borrowings to fund ambitious growth plans. Considering the financial strain of the railways, a parliamentary panel had recently suggested to get the government to share a part of its pension burden.

The Standing Committee on Railways has said in its fifth report on demand for grants by the railways that unlike other government departments, it continues to bear the entire pension burden on its own shoulders, and it goes under its working expenses. The committee suggested that the Finance Ministry could share the railways’ pension liability.

For 2020-21, the expenditure on railways staff is estimated at ₹92,993 crore, a 7 per cent increase over the revised estimates of 2019-20. And, allocation to the Pension Fund is estimated at ₹53,160 crore, which is 10 per cent higher than the revised estimates of 2019-20, or an additional nearly ₹5,000 crore.

Higher pension pay out affects the railways’ capability to allocate resources to the Depreciation Reserve Fund (DRF), which is meant to renew older assets. In 2020-21, appropriation to the DRF was estimated at ₹800 crore, a huge climbdown from the ₹5,200 crore provided in 2017-18. In 2018-19, it was ₹300 crore and ₹400 crore the next fiscal.

Higher pension liability also negatively impacts the transporter’s operating ratio (OR), a measure of how much the railways spends to earn each rupee. The operating ratio was at 97.29 per cent for financial year 2019. In this context, the recommendation of the parliamentary panel is significant.

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“The committee finds that IR (Indian Railways) is the only department of the government of India which meets the pension expenditure of its retirees from own receipts, while in respect of all other departments, the share is met by the Ministry of Finance. The Railway Ministry, therefore, submitted that it is increasingly becoming difficult to bear the pension expenditure from IR revenues, more so, when the social service obligations have crossed ₹50,000 crore in 2018-19.

Moreover, the New Pension Scheme (NPS) implemented in 2004 and intended to reduce the government’s pension bill would start giving results only around 2034-35. The railway ministry’s constraints in this regard merit due attention.

“The committee desires that the feasibility of bearing at least a part of the Railways’ pensionary liabilities by the Ministry of Finance, consequent upon the merger of the Railway Budget with the General Budget, be explored so as to provide some relief to the Railways at least till 2034-35,” the parliamentary panel has said.

This is not the first time a parliamentary panel has asked the government to share the IR’s rising pension burden. The same recommendation has been made multiple times earlier but the government has expressed its inability to accede to such a request each time. V K Yadav too had also requested the Finance Ministry to start a pension fund to ease the burden on IR.

However, the finance ministry has allowed the IR’s pension obligation for the current fiscal to be deferred due to the devastating impact of COVID-19 on IR’s earnings. Against the pension pay out of ₹53,160 crore, only ₹523 crore or less than one per cent has been accounted for in the revised estimates for FY21.

The question is whether the finance ministry will shoulder a part of IR’s pension burden each year henceforth and how will the IR repay the amount deferred for this fiscal.

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According to PRS Legislative, IR’s pension bill, “may increase further in the next few years, as about 40 per cent of the railways staff was above the age of 50 years in 2016-17.”

Meanwhile, it is all very well to speak of enhanced capex through budgetary allocations for IR year on year but it has been unable to spend all the allocation made at the beginning of each fiscal year. Analysts have already estimated IR’s capex in the current fiscal to be lower than the targeted ₹1.6 lakh crore since nearly a third has remained unused till January. The parliamentary panel has pointed towards year-on-year under-utilisation for at least three years.

On its part, the IR says it is unable to spend all the allocated capex since there is nowhere near enough internal resource generation due to a fall in passengers and freight earnings.

Traditionally, IR has been increasing its freight fares to subsidise passenger fares. With one of the highest freight rates in the world, IR is losing its grip on freight movement since road transport is cheaper; while the AC passenger traffic has slowly moved to flying and the IR has lost this creamy layer to civil aviation. Growth in both passenger and freight transport has been low for the past few years. In this situation, the IR does not want to increase market borrowings to avoid increasing interest payment obligations.