The Comptroller and Auditor General (CAG) has flagged Indian Railways for using government grants to pay lease charges to its financing arm, IRFC, totaling ₹22,699 crore in FY25. This move, intended to be funded by internal revenue, diverts money from capital projects. The audit also highlighted major delays in safety work execution, adding pressure to IRFC shares, which have declined roughly 35% from their yearly peak.
A new audit report by the Comptroller and Auditor General (CAG) has raised concerns about the financial management of Indian Railways. The report, which covers fiscal year 2024-25, specifically criticized the practice of using Gross Budgetary Support (GBS)—funds allocated from the national budget—to pay lease charges to the Indian Railway Finance Corporation (IRFC).
According to the audit, the Railways channeled ₹22,699 crore of taxpayer-funded grants to meet these lease payments. Auditors noted that such payments are intended to be covered by the Railways' own internal revenue surplus. By relying on budgetary grants instead, the Railways has effectively used public funds to clear debt obligations rather than funding new infrastructure projects. The CAG has termed this an "unhealthy trend" that reduces the money available for actual capital development.
Financial Strategy and IRFC Performance
For investors, the report highlights an underlying issue regarding the financial flexibility of the railway sector. IRFC, which acts as the financing arm for Indian Railways, depends on these lease payments to generate its revenue and support its operations. If the Railways struggle to generate sufficient internal surpluses to cover these costs, it raises questions about the long-term sustainability of the current funding model.
IRFC shares have faced significant downward pressure in 2026, dropping approximately 35% from their 52-week high. Market sentiment has been impacted by concerns over the company's ability to grow its assets under management (AUM), competitive margins, and the potential for government stake dilution. The CAG's observation adds to these concerns, as it suggests that the Railways—IRFC’s primary borrower—is finding it difficult to maintain financial independence without relying on government budgetary support.
Safety Projects and Operational Hurdles
The CAG audit also brought attention to significant execution failures within the Rashtriya Rail Sanraksha Kosh (RRSK), a fund dedicated to safety-related projects. The report revealed that over 20,304 safety projects remain incomplete. The audit noted that these delays occur despite the existence of a dedicated fund, pointing to poor planning and execution speed by the railway administration.
Furthermore, the Railways failed to meet its own targets for contributing to this safety fund. While the goal was to contribute significantly from internal resources, the actual contribution over the first five years was just ₹5,324.62 crore, far below the envisaged ₹25,000 crore target. The report also pointed out that unsanctioned expenditure—money spent without proper approval or estimation—has risen to ₹19,458.25 crore in FY25, across more than 1,300 individual cases.
Investors and market observers will likely monitor future railway budgets to see if the practice of using grants for debt repayment continues or if the Railways can improve internal revenue generation. Other key factors to track include the speed of clearing the backlog of safety projects and any official management commentary regarding these audit findings.