Operating ratio

Indian Economy glossary

Topic: Infrastructure: Transport, Communications and Energy · NCERT: Beyond NCERT

Meaning

Operating ratio shows how much Indian Railways spends to earn every ₹100 from its traffic. It is the ratio of working expenses (day-to-day running costs) to traffic earnings (money earned from passengers, freight and other traffic), written as a percentage.

Operating ratio = (Working expenses ÷ Traffic earnings) × 100

It matters because it shows whether the railways can pay for their own growth. A lower ratio is better. It means more money is left over after running costs, and that money can pay for new track, coaches and stations.

Explanation

How it works

  • Working expenses are the running costs of the railways:
  • salaries of staff;
  • pensions of retired staff;
  • fuel (diesel and electricity);

  • maintenance of track, engines and coaches.

  • Traffic earnings are the money the railways earn by running trains:

  • passenger fares;
  • freight charges (money paid to carry goods);

  • other traffic income.

  • How to read the ratio:

  • Below 100%: the railways earn more than they spend on running costs. The gap is the surplus.
  • Exactly 100%: all earnings are used up. Nothing is left for investment.
  • Above 100%: the railways spend more than they earn and make a loss on operations.

Worked example

  • Simple case: traffic earnings are ₹100 and working expenses are ₹98.
  • Operating ratio = (98 ÷ 100) × 100 = 98%.

  • Only ₹2 of every ₹100 is left for new investment.

  • Real case: the operating ratio was 98.22% in 2024–25 (actual). So only about ₹1.78 of every ₹100 earned was left over [2].

  • What the example shows: the railways earn a great deal of money, but almost all of it goes on running costs. Very little is left to build new assets.

What makes it rise or fall

  • The ratio rises (gets worse) when:
  • salary and pension bills grow. About 90% of revenue is already committed to salaries, pensions and lease payments (2026–27) [2];
  • passenger fares are kept low while costs keep rising;

  • freight moves to roads, so freight earnings fall.

  • The ratio falls (gets better) when:

  • running costs fall. For example, electric traction is about 70% more economical than diesel traction [1];
  • freight volumes grow. Freight loading reached a record 1,670 million tonnes in 2025–26 [1];

  • fares are made more rational and non-fare income grows.

  • A note of caution: the ratio covers only running costs. It does not include capex (capital expenditure, meaning spending on new assets such as track, coaches and stations). A good ratio alone does not show whether enough is being invested.

In India

  • Who uses it: the Ministry of Railways reports the operating ratio every year. It is the main measure of how healthy railway finances are. PRS and Parliament's analysis of the railway Demand for Grants also track it.
  • Budget link: the separate Rail Budget was presented every year from 1924. It was merged with the Union Budget in 2017, so railway finances, including the operating ratio, are now presented as part of the Union Budget.
  • Constitutional basis: railways are in the Union List, entry 22 (Seventh Schedule). So the Union alone manages railway finances.
  • Recent figures [2]:
Year Operating ratio
2024–25 (actual) 98.22%
2025–26 (revised estimate) 98.82%
2026–27 (budget estimate) 98.40%
  • NCERT describes the ratio as "around 98%".
  • Result: capex depends on the Union government.
  • Railway capex is ₹2,93,030 crore (2026–27 budget estimate).
  • Budgetary support (money given by the Union government from its budget) of ₹2,78,030 crore pays for 95% of it [2].

  • Because the operating ratio is so high, the railways' own surplus pays for very little of their investment.

  • Cross-subsidy behind the ratio:

  • Cross-subsidy means using profit from one service to cover losses on another.
  • Freight gives 62% of traffic revenue, while passengers give only 29% (2026–27 budget estimate) [2].
  • Freight surplus covers losses on cheap passenger fares. Without it, the operating ratio would be much worse.

Don't confuse with

  • Profit margin: an operating ratio of 98% does not mean a 98% profit. It means ₹98 goes on running costs and only ₹2 is left as surplus. Here a lower number is better.
  • Capital expenditure (capex): working expenses are running costs such as salaries and fuel. Capex is spending on new assets such as track and coaches. Capex is not part of the operating ratio.
  • Budgetary support: this is money from the Union government for railway capex. It is not counted in traffic earnings, which include only passenger, freight and other traffic income.
  • Ratios where a higher value is better (such as a bank's capital adequacy ratio): for the operating ratio, a lower value means better finances. MCQs often test this direction.

Prelims Hooks

  • Formula: Operating ratio = (Working expenses ÷ Traffic earnings) × 100. A lower ratio means better finances.
  • Latest actual: 98.22% in 2024–25, so only about ₹1.78 of every ₹100 is left over [2]. The figure is 98.82% for 2025–26 (RE) and 98.40% for 2026–27 (BE) [2].
  • Working expenses include salaries, pensions, fuel and maintenance. They do not include capex on new track or coaches.
  • Rail Budget was presented separately from 1924 and merged with the Union Budget in 2017.
  • Trap: "An operating ratio above 100% means the railways earn a surplus." This is wrong. Above 100% means a loss on operations.
  • Budgetary support pays for 95% of railway capex (2026–27 BE) [2]. It does not come from traffic earnings.

Mains Points

  • Weak internal finances limit investment:
  • An operating ratio of about 98%, with 90% of revenue tied up in salaries, pensions and leases (2026–27), leaves almost no surplus [2].
  • So 95% of capex (2026–27) comes as budgetary support [2]. Railway growth then depends on the Union's fiscal space (how much the government can spend without borrowing too much).

  • Useful reform points: show social-service costs (losses on cheap fares for social reasons) separately, fund pensions properly, and monetise assets (earn money from unused land and assets).

  • The cross-subsidy trap keeps the ratio high:

  • Passenger fares are kept low → freight is charged high tariffs to cover the loss → companies send cargo by road → rail's freight share and earnings fall.
  • Rail freight is still concentrated in coal and bulk goods. Container traffic remains a small share [2].

  • Rational fares, faster movement on dedicated freight corridors and better container logistics can raise traffic earnings and bring the ratio down.

  • Cost-side reforms help the ratio:

  • Electric traction is about 70% more economical than diesel [1].
  • Electrification saved about 180 crore litres of diesel in 2024–25 [1].
  • Lower fuel bills cut working expenses and reduce oil imports. This links railway finances (GS-III infrastructure) with energy security and climate goals.

Related concepts

Read more

Sources

  1. 1From Steam to Speed: The Ever-Evolving Journey of Railways (PIB, 15 April 2026)static.pib.gov.in · tier 1
  2. 2Demand for Grants 2026-27 Analysis: Railways (PRS)prsindia.org · tier 1