Balancing the Books While Staying on Track

Despite growing revenues, Indian Railways grapples with financial constraints and an evolving transport landscape.

Indian Railways is the lifeline of the nation, moving millions of passengers and billions of tonnes of freight. Its sheer scale is staggering: 68,000 kilometres of track, over 13,000 passenger trains daily and a workforce of more than a million people. Despite its indispensable role in India’s economy, the financial engine that powers this vast enterprise remains a puzzle of constrained revenues, mounting operational costs and a delicate balancing act between public service and profitability.

Gone are the days when the Railway Budget was an annual spectacle, with politicians announcing new trains like festival giveaways. Since 2017, the railway’s finances have been absorbed into the Union Budget, a move that signified both modernization and a shift towards greater fiscal scrutiny. Yet, old tensions persist. Indian Railways is expected to be both a people’s service and a revenue-generating behemoth, a contradiction leading to a financial model heavily reliant on freight cross-subsidization.

For all its grandeur, the Indian Railways is largely bankrolled by its freight business. In FY 2025-26, freight operations are expected to bring in Rs. 1.88 trillion, accounting for 62 percent of total revenue. Coal alone contributes nearly half of all freight earnings, making the Railways deeply intertwined with India’s energy and industrial ecosystem. Cement, containers and agricultural produce form the next biggest categories, though their revenue share remains modest in comparison.

Freight transport has historically grown at an average of 4 percent annually, and Indian Railways aims to push this higher with increased capacity and efficiency. However, the competitive landscape is shifting. As highways improve and logistics companies capitalize on faster road transport, rail freight is under pressure to reinvent itself. While the Railways offers an economical and environmentally sustainable freight solution, it must find ways to remain competitive against road and air transport that promise speed and flexibility.

Indian Railways’ passenger segment is a paradox - an essential public service that routinely runs at a loss. Revenue from passenger services is expected to touch Rs. 0.92 trillion in FY 2025-26, marking a steady increase. Yet, in the absence of fare revisions, this growth is largely organic. The Railways measures passenger traffic in Passenger Kilometres (PKM), and by this metric, both suburban and long-distance travel are seeing healthy increases.

A telling shift has been the rising preference for air-conditioned travel. AC services now account for 29 percent of total passenger volume, up from just 10 percent a decade ago, signalling an emerging middle class willing to pay more for comfort.

Running one of the world’s largest railway networks is not cheap. The Railways’ revenue expenditure for FY 2025-26 is budgeted at Rs. 2.99 trillion, with nearly 43 percent allocated to salaries, 23 percent to pensions, and a significant chunk to power and fuel. These expenses leave little room for flexibility.

Adding to this is the cost of financing. The Indian Railway Finance Corporation (IRFC) borrows from the market to fund rolling stock, and lease payments to IRFC now make up 11 percent of total expenses from 7 percent just two years ago. The operating ratio, a key financial indicator measuring expenses per Rs. 100 of revenue, stands at a daunting 98.4 percent. In simpler terms, for every Rs. 100 earned, the Railways spends Rs. 98.40, leaving an operating surplus so thin that even minor financial shocks could prove disruptive.

The government remains the primary financier of capital investments in Indian Railways. Over the past three years, a significant portion of this has been allocated to manufacturing new rolling stock, expanding and doubling existing lines, and modernizing infrastructure.

However, one area seeing a notable decline is funding for railway public sector undertakings (PSUs). Government capital infusion into railway PSUs has been steadily reduced, reflecting a shift towards greater financial self-reliance for these entities.

The Railways is no longer the unchallenged transportation giant it once was. The rise of efficient highway networks and budget airlines has cut into its passenger market. Indian Railways, despite its scale, is now in direct competition with alternative transport ecosystems that offer greater speed and convenience.

Should the Railways chase profitability or remain a public service at a loss? Political reluctance to raise fares has deepened its reliance on freight cross-subsidization, straining its financial model. With fare rationalization, freight modernization, and cost control on the horizon, tough choices loom. One thing is certain: the train cannot afford to slow down.

(The author is a Chartered Accountant and works at Authomotive Division of Mahindra and Mahindra Limited. Views personal.)