Getting the Railways Back on Track

By folding populist habits into a harder budgetary logic, India’s railways are discovering that reform is less about new trains than about financial realism.

For decades after independence, the Railway Budget, presented separately from the Union Budget, became a theatrical exercise in political generosity, packed with announcements of new trains and pet projects designed to flatter local constituencies. The result was a sprawling system admired for its engineering prowess but crippled by inefficiency and chronically dependent on public funding.

The decision by Narendra Modi’s government to end this annual pageant and merge the railway finances with the Union Budget signalled a philosophical shift from politics to productivity. The railways, long styled as the lifeline of the Indian economy, are now being asked to plan like a business that serves national priorities rather than a patronage machine that serves electoral ones.

The budget cycle for 2026–27 reflects that ambition. Capital outlay is at a record high, and the ministry has launched an unusual initiative titled “52 weeks, 52 reforms,” promising weekly, system-wide improvements in customer service, maintenance and safety. The stated aim is to bring train accidents down to single digits from 11 in 2025–26. Sustainability, too, is now more than a slogan, with commitments to greener passenger systems and cleaner freight operations. Plans for seven high-speed rail corridors, pitched as growth connectors, sit alongside the near-completion of the Dedicated Freight Corridor (DFC) network.

The numbers tell a story of both momentum and constraint. Total revenue for 2026–27 is projected at Rs 3.02 lakh crore, an increase of 8.4 percent over the revised estimates of the previous year. Nearly 91 percent of this is expected to come from traffic operations. Passenger revenue is forecast to grow by 9.1 percent and freight by 5.8 percent.

Rising Expenditure

Expenditure, meanwhile, continues to rise remorselessly. Revenue spending is budgeted at Rs 2.99 trillion, up 8.1 percent, while capital expenditure is pegged at Rs 2.93 trillion, a rise of 10.5 percent. About 95 percent of this capital spending is financed by the central government.

Freight remains the backbone of the system. In 2026–27 it is expected to generate Rs 1.89 trillion, or 62 percent of internal earnings, dwarfing passenger services at 29 percent. Between 2017–18 and 2026–27, freight has contributed an average of 68 percent of internal revenue. But it makes the railways acutely sensitive to shifts in freight volumes and margins.

That sensitivity is becoming riskier. Rail’s share of national freight traffic has slipped to about 26–27 percent from 36 percent in 2007–08. The government wants to raise it to 45 percent by 2030 - a heroic target that would require reforms in pricing, reliability and last-mile connectivity. Roads, despite being nearly 50 percent more expensive for comparable loads, continue to lure time-sensitive cargo with their flexibility and speed. Congestion, high tariffs and slow average train speeds have not helped rail’s case.

Coal still accounts for over half of rail freight tonnage, but its long-term decline in power generation forces diversification into automobiles, fast-moving consumer goods and domestic container traffic. The DFCs are a bright spot, delivering faster speeds and higher throughput, supported by ‘Cargo Plus’ hubs designed to cut logistics costs. The proposed East–West DFC, linking mineral-rich eastern India to western markets, could add crucial capacity. Yet mundane constraints such as pilot shortages and congestion on feeder routes threaten to blunt these gains.

Passenger services tell a different, more politically fraught story. Earnings are projected at Rs 87,300 crore in 2026–27, driven by premium air-conditioned services and modern trains such as Vande Bharat. But these glossy offerings sit atop a vast, loss-making base. Non-AC classes make up about 70 percent of the fleet and nearly two-thirds of passenger kilometres, yet Sleeper and General classes together incur losses exceeding Rs 33,000 crore.

The railways’ social service obligation now exceeds Rs 60,000 crore annually, funded almost entirely by freight surpluses. Cheap passenger tickets mean expensive freight tariffs, which in turn push cargo onto roads.

Passenger fares were raised twice in 2025 after a five-year freeze, while freight rates have not been revised since 2018. The Economic Survey for 2025–26 warned that high freight tariffs inflate logistics costs and undermine competitiveness. Rationalising them would not only boost rail’s market share but also help decongest highways and cut carbon emissions.

Non-fare revenue remains an underexploited frontier. It accounts for about 9 percent of earnings, a far cry from the 30 percent common among global peeRs Catering, tourism and digital services via IRCTC are expanding, while the National Monetisation Pipeline 2.0 aims to raise Rs 2.5 trillion through public–private partnerships and asset monetisation. Planned sales of stakes in public-sector units could fetch Rs 80,000 crore, easing borrowing needs and injecting market discipline.

Mounting Challenges

The toughest constraint, however, lies in costs that refuse to bend. Staff salaries and pensions absorb a staggering share of revenue, an average of 71 percent over the past decade. In 2026–27, salaries are projected to take 41 percent of internal revenue and pensions another 25 percent. The approval of the 8th Central Pay Commission in late 2025 looms large. Its predecessor pushed annual expenditure up by Rs 22,000 crore and sent the operating ratio soaring. With little room to raise fares or freight rates, higher staff costs risk squeezing funds for maintenance and investment.

Capital spending has surged but its productivity is under question. The capital output ratio has worsened sharply, suggesting diminishing returns from each rupee invested. High-gestation projects such as high-speed rail and the DFCs, combined with rising construction costs, make project management and inflation control critical.

Debt adds another layer of pressure. Borrowing through the Indian Railway Finance Corporation has pushed outstanding liabilities to a projected Rs 4.3 trillion in 2026–27.

India’s railways thus stand at a crossroads. To support the vision of a ‘Viksit Bharat,’ they must evolve from a subsidised monopoly into a modern, multimodal logistics platform which is commercially sharper yet socially conscious.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)