Train accidents have become so common in India that they, alarmingly, no longer evoke widespread outrage. However, each accident points to a deeper, systemic crisis within the Indian Railways, calling for increased investment and reforms in the railway system. The basket of problems of the Railways has been spilling over for so many years. Frequent accidents, massive casualties, awfully dismal infrastructure, chronic overcrowding, insufficient train connectivity, corruption, and inadequacy of passenger amenities, all contribute to an ever-growing list of concerns that continue to plague India’s railway sector.
The lack of sufficient investment in upgrading capacity and modernising infrastructure has become a pressing issue. Modernisation of railway stations is progressing at a slow pace, and many still lack basic amenities. Over 98% of the revenue is consumed by operating costs, leaving little room for modernisation. This chronic underinvestment has led to severe congestion on high-demand freight routes and a significant reduction in average speeds — sometimes as low as 30 kmph. Consequently, the Railways struggles to remain competitive against road transport. Delays and inefficiencies are increasingly common, and without a comprehensive and sustained modernisation effort, the system risks further deterioration, with safety and operational challenges only set to escalate.
Though the Railways has been in dire need of big money in the wake of massive annual losses, passenger fares had remained unchanged for five years till July 1. The Comptroller and Auditor-General observed in 2021 that the operational losses in the passenger segment increased from ₹36,286 crore in 2015-16 to ₹68,269 crore in 2021-22, which had to be cross-subsidised entirely using the surplus generated from freight. Moreover, a statement printed on IRCTC tickets, “IR recovers only 57% of the cost of travel on average,” underscores the long-standing issue of under-recovery in passenger operations. Therefore, in this sense, an across-the-board fare increase was long overdue. For the first time since January 2020, the Union government finally raised the passenger fares, effective July 1.
The Railways’ internal revenue primarily comes from passenger and freight collections and sundry heads such as rent, catering receipts, commercial utilisation of land, and advertisements. The Union Budget for 2025-26 projects freight to contribute 62% of the total internal revenue in 2025-26, with passenger train operations contributing 31% and sundry revenue 4%.
However, revenue from passenger and freight fares is largely consumed by high operational costs, leaving little for capital expenditure and modernisation. Therefore, the government provides budgetary support for these initiatives. In 2025-26, Budget estimates indicate that government support, including both budgetary and extra-budgetary resources, will account for about 99% of capital expenditure and the remaining 1% from internal revenue.
Debt trap
Government support through gross budgetary support and extra budgetary resources is crucial to sustaining capital expenditure. However, it is equally important for the Railways to generate sufficient revenue to finance these expenditures, or it would risk falling into a debt trap. The rising debt servicing obligations for extra budgetary resources have become a concern. Interest expenditure is projected to grow from ₹8,598 crore in 2016-17 to ₹31,433 crore in 2025-26, while principal repayment will rise from ₹7,000 crore to ₹27,905 crore over the period. In 2025-26, these combined expenditures are expected to account for 20% of internal revenue. This, in turn, reduces the funds available for capital spending.
In this context, the recent modest fare increase implemented by the government could be an attempt to address these financial needs. However, its impact on the overall financing of the Railways is likely to be minimal. In fact, this increase is the lowest since 2013. The staggered increases — ranging from 2 paisa per km for air-conditioned sleeper class, 1 paisa per km for non-AC sleeper class, and just half a paisa per km for second class — will have negligible effects on the Railways’ finances. Additionally, the government’s decision to leave suburban fares, ordinary class, and monthly season ticket rates unchanged is puzzling.
Problems with pricing policy
The pricing policy of the Railways has several shortcomings. First, it disproportionately burdens passengers opting for AC coaches, and such a policy could backfire, as these passengers may switch to alternative modes of transport. To put this into perspective, 5.2% of the 809 crore passengers on AC coaches contributed 54% of the total passenger revenue of ₹80,000 crore in the financial year 2024-25. This underscores the vital role that premium services play in sustaining the financial health of the Railways.
Second, not raising suburban fares is both regressive and populist — it effectively means forgoing a legitimate and significant source of revenue. In 2021-22, the loss from suburban railway services was ₹8,316 crore. Moreover, the Railways recovers a mere 37% of the costs from suburban railway services, underscoring the immense financial strain they are under. Similarly, keeping ordinary class fares unchanged means forgoing significant revenue, with Indian Railways incurring a ₹15,282-crore loss in 2021-22 from operating passenger, local, and ordinary trains.
Third, the Railways’ over-reliance on freight fares for revenue generation is a significant concern, using these to cross-subsidise passenger services. This strategy comes at a cost, as freight has been losing market share to road transport. According to the Union Budget 2025-26, the Railways’ share of freight traffic has declined from 36% in 2007-08 to around 26% in 2021-22. Additionally, about 52% of freight revenue in 2025-26 is expected to come from coal transport, up from 45% in 2015-16, highlighting an increasing dependence on coal for revenue. However, India’s climate change commitments suggest that the Railways will earn less revenue from coal transport in the future.
Finally, the policymakers have been oblivious of the fact that railway fare cannot be insulated from the impact of inflation. This meagre fake hike will mean nothing next year in real terms. In fact, policy eyewashes do more harm than it intends to serve. For such visible public goods, any price rise leads to public resentment, so cosmetic, tiny-bit fare increases prolong the delay in defraying the big-money costs of operations. As consumers would cry foul at fare hikes in quick succession, and any fare hike, big or small, takes a gap of five or six years, so small hikes become inadequate for a sector known for guzzling big money.
Rational strategy
The data suggest that revenue from passenger services across categories fail to cover costs. Except AC 3-tier and AC chair car (in certain years), all other classes of passenger services have recorded losses in all four years between 2018-19 and 2021-22.
While losses in the passenger segment are often justified as the social service obligation of the Railways to provide affordable transportation, this argument should not be overused to the point that it mirrors the situation with BSNL or Air India. As the Standing Committee on Railways (2020) recommended, the social service obligation need to be reassessed. A more prudent approach would involve rationalising passenger fares across the board to reduce losses while still ensuring affordability. This will require small, frequent fare hikes aligned with inflation and implemented uniformly across all categories.
While the objective of the Railways must not be to make profits, it must not incur losses either, forcing it to depend on the government budgetary support every single year. Instead, it should aim for a reasonable, sustainable profit that allows it to fund capital expenditure and modernisation projects. Train travellers know the hardships faced by the average passenger. If they genuinely care about the comfort, safety, and dignity of rail users, they must support the modernisation of the Railways and the improvement of passenger amenities. These upgrades come at a cost. With operating expenses over 98% of revenues, periodic fare revisions are necessary and inevitable. After all, there is no such thing as a free lunch.
Santosh Kumar Dash is an Assistant Professor at IRMA School, Tribhuvan Sahkari University, and Sitakanta Panda is an Assistant Professor of Economics at the School of Humanities, Social Sciences and Management, Indian Institute of Technology, Bhubaneswar. Views expressed are personal