Operating ratio, a measure of operational efficiency, is the ratio of amount spent to earn every ₹100. A higher ratio signals weak ability to generate a surplus, while a lower operating ratio means the Railways can spend more on large capex projects. In FY26, the operating ratio is expected to be below 98%, the first time since FY21, the people cited above said on the condition of anonymity.
After falling to 97.45% in 2020-21, the Railways’ operating ratio in the next four years remained high at 107.39%, 98.14% and 98.65% (revised estimates), and 98.22% (budget estimate) in FY22, FY23, FY24 and FY25 respectively. The finance ministry expects the national transporter to build on its success of increasing revenues over the past three years and strengthen its finances in FY26.
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Operating ratio of the Railways, India’s largest employer and transporter, has remained high due to its heavy pension liability. However, its post-pandemic rebound and the pick-up in freight and passenger revenues may give it enough room to improve internal revenue generation in FY26, driving down the operating ratio.
A query sent to Union railway ministry remained unanswered. However, a ministry official said on the condition of anonymity that more than 10% growth in revenues (passenger and freight) may raise Railways’ internal revenue generation in FY26 to over ₹5,000 crore, that should bring operating ratio below 98%.
In FY25, Railways’ internal revenue generation is expected to remain flat at ₹3,000 crore.
Challenges and strategies
“A big, aged, unanswered question in front of us is how we as a nation can fix these poor operating ratios,” said Shailesh Agarwal, partner – risk consulting, EY India. “Indian Railways has never been able to meet operational expenses of passenger services with the revenue it generates. Passenger services are in losses as compared to freight services that are more profitable,” Agarwal said, suggesting the railway ministry can look at raising passenger fares to match the cost of service.
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It is expected that the gross budgetary support (GBS) will again remain above 90% of the total allocation, providing enough funds to bring Railways’ books in order in FY26, with operating ratio falling closer to FY21 level of 97.45%, one of the persons quoted above said.
The Railways is looking to make the organization a self-sustaining entity in the long run. However, it will have to continue its dependence on budgetary support for funds required to carry out large service augmentation exercises, that also include investment in new generation technology for the safety of operations and latest coaches and locomotives for more speed and efficiency..
After two pandemic years that curbed mobility and crimped revenues, Railways registered a smart recovery from FY23 onwards, and is expected to sharply increase its freight and passenger traffic in FY26. The optimism means that Railway Budget would peg a double-digit growth in its traffic revenue (both passenger and freight) for FY26.
In FY25, Railways’ traffic revenue is estimated to be ₹2,78,100 crore, comprising 99.8% of the total revenue and a growth of 8% over the previous year. About 65% of this revenue is estimated to come from freight services ( ₹1,80,000 crore), and 29% from passenger services ( ₹80,000 crore).
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“The Railways should take advantage of technology to optimize manpower cost. Other important actions for improving operating ratios could be by closing down lines where the traffic earnings are less, reducing halts for trains at small stations (one extra halt for a train increases the fuel consumption by between 1-2%), stop investing money in uneconomic ventures e.g. electrification of lines which is not economically justified. Also, more PPP projects should be identified and executed,” Agarwal of EY India said.
In the pandemic year FY21, the Railways got a central loan of around ₹80,000 crore to make up for the covid-related resource gap, which helped it keep operating ratio in check. However, this remained unavailable in FY22, worsening the ratio to 107.39%, much higher than the 96.15% the national transporter had budgeted. However, with a higher operating ratio in the previous year and increased capex, the operating ratio for FY23 remained relatively lower at 98.14%.
Though operating ratio for FY24 and FY25 also remained high over higher provisioning towards pension at around ₹60,000 crore and ₹65,000 crore respectively, this provisioning itself would provide some relief to railways on spending its internal revenues in FY26.
Besides, GBS is expected to rise by up to 10% to about ₹2.90 trillion next fiscal, while the national transporter is also hoping to increase its freight earnings to 4.5-5 million tonnes per day next year from just about 4 mt per day now and earn over ₹2 trillion. Also, normalcy in travel and expected growth in passenger revenues may help bring down the operating ratio in FY26.
In FY21, passenger train services were stopped to slow the pandemic’s spread, shrinking revenue from freight and passengers by 16% and 75% from budget estimates. In FY22 too, passenger revenue fell 27%, but freight earnings rose 5% over budget estimates. Still, the operating ratio improved in FY21 to 97.45% from around 98.4% in the previous year, largely on account of a growth in freight earnings and additional central fund support. Also, the transporter cut its cost, ending several subsidized rail services.
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The FY26 rail budget is expected to take measures to augment resources while curbing non-essential expenditure. Full electrification of the broad gauge line is also expected to be completed in FY26, which could reduce the railways’ fuel bill by almost ₹10,000 crore annually. Also, the focus will be on increasing the share of non-fare revenue sources in railways’ total revenue. This could be done through increased asset monetization, especially on the dedicated freight corridor and the sale and commercialization of railway land at key destinations.
