Why in news?

A recent Supreme Court order cancelling Indian Railways' "Deemed Licensee" status — which had allowed it to procure electricity without paying surcharges — combined with a decline in freight loading and earnings in April, has triggered serious financial alarm within the Railway Board.

What’s in Today’s Article?

• Background — How Electricity Procurement Works?
• Why This is a Big Deal — Railways and Electricity
• The Operating Ratio Challenge
• Revenue Structure of Indian Railways
• Way Forward — What Needs to Change

Background — How Electricity Procurement Works?

• Under the Electricity Act, 2003, consumers can procure electricity in two ways:
  • From the Distribution Licensee in their area of supply (the regular electricity company).
  • From alternative sources through Open Access — directly from power generators or the grid.
• When a consumer uses Open Access, two surcharges apply:
  • Cross-Subsidy Surcharge — levied to compensate distribution companies for the revenue they lose when large consumers bypass them.
  • Additional Surcharge — levied to offset the cost of maintaining the distribution network.
• These surcharges exist because distribution companies provide subsidised electricity to certain categories like agricultural users and low-income households — and the revenue shortfall from large consumers leaving must be compensated.
• Railways' Special Status
  • Indian Railways had been classified as a "Deemed Licensee" — a type of distribution company that supplies electricity rather than consuming it for its own use.
  • Under this classification, Railways was procuring electricity through Open Access without paying Cross-Subsidy Surcharge and Additional Surcharge — resulting in significant cost savings.
• What the Supreme Court Did?
  • The Supreme Court's May 8 order cancelled this Deemed Licensee status, meaning Railways must now pay these surcharges like any other large consumer.
  • The Railway Board estimates this will increase traction energy costs by more than 30%.

Why This is a Big Deal — Railways and Electricity

• Indian Railways is the largest single user of electrical energy in India.
• The total amount spent on traction electricity (electricity used to run trains) in 2024-25 was ₹32,378 crore — one of the biggest components of Ordinary Working Expenses (OWE).
• A 30%+ increase in this cost alone would translate to an additional burden of approximately ₹9,700 crore or more — a significant blow to an already strained budget.
• The Broader Financial Stress — Multiple Pressures Simultaneously
  • The Supreme Court order arrives at a particularly vulnerable moment for Railways.
  • The Railway Board's letter to general managers of all zonal railways highlighted several concurrent financial pressures:
    • Rising Expenditure
      • Ordinary Working Expenses (OWE) increased by 11.6%.
      • Pension expenditure increased by 9.1%.
    • Declining Freight Performance
      • Freight loading declined by 1%.
      • Freight earnings declined more sharply by 5% — worse than even the corresponding figures for April 2024.
  • This is a "double whammy" — costs rising sharply while the primary revenue source is simultaneously declining.

The Operating Ratio Challenge

• Operating Ratio measures how much Railways spends to earn every ₹100.
• It should ideally be as low as possible — a lower operating ratio means greater financial efficiency and more surplus available for investment.
• Indian Railways' operating ratio has remained above 98% for years — meaning it spends over ₹98 to earn every ₹100.
• This leaves a razor-thin margin for capital investment, debt repayment, and network expansion.
• The combination of rising energy costs and falling freight revenue risks pushing the operating ratio even higher — potentially above 100%, meaning Railways would spend more than it earns.

Revenue Structure of Indian Railways

• Passenger services in Indian Railways are heavily subsidised — fares are kept below cost for social and political reasons.
• This means freight revenue is the lifeline of Railways' finances, contributing over 65% of total revenue.
• The net earnings trend is deeply concerning — declining from ₹2,660 crore to a revised ₹1,957 crore in 2025-26, leaving virtually no financial cushion for the system.
• Indian Railways is simultaneously facing:
  • Revenue Side — Freight earnings declining, passenger revenue subdued due to subsidised fares, freight loading falling.
  • Expenditure Side — OWE rising 11.6%, pension costs rising 9.1%, and traction energy costs set to rise 30%+ due to Supreme Court order.
  • Structural Challenge — Operating ratio chronically above 98%, leaving no room for absorbing additional shocks.
• Together, these pressures constitute a financial perfect storm for Indian Railways.

Way Forward — What Needs to Change

• For Railways to restore financial health, several structural interventions are needed —
  • rationalising passenger fare subsidies to reduce cross-subsidisation from freight,
  • diversifying revenue sources beyond freight and passenger (real estate, advertising, logistics parks),
  • improving energy efficiency through faster electrification and renewable energy adoption to reduce dependence on grid electricity,
  • increasing freight competitiveness to win back traffic lost to road transport, and
  • exploring legal remedies or legislative changes to restore or replace the financial benefits lost from the Deemed Licensee status cancellation.