Recently, the government announced that it plans to transfer benefits under various schemes directly into the bank accounts of individual beneficiaries. Benefits can be the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) wages, scholarships, pensions and health benefits. Beneficiaries shall be identified through the Aadhaar number (Aadhaar is an individual identification number linked to a person’s demographic and biometric information). The direct cash transfer (DCT) system is going to be rolled out in 51 districts, starting January 1, 2013. It will later be extended to 18 states by April 1, 2013 and the rest by April 1, 2014 (or earlier). Presently, 34 schemes have been identified in 43 districts to implement the DCT programme. Currently, the government subsidises certain products (food grains, fertilizers, water, electricity) and services (education, healthcare) by providing them at a lower than market price to the beneficiaries. This has led to problems such as high fiscal deficit, waste of scarce resources and operational inefficiencies. The government is considering replacing this with an Aadhaar enabled DCT system. It has claimed that the new system would ensure timely payment directly to intended beneficiaries, reduce transaction costs and leakages. However, many experts have criticised both the concept of cash transfer as well as Aadhaar (see here, here, here and here). In this blog, we provide some background information about cash transfer, explain the concept of Aadhaar and examine the pros and cons of an Aadhaar enabled direct cash transfer system. Background on cash transfer Under the direct cash transfer (DCT) scheme, government subsidies will be given directly to the beneficiaries in the form of cash rather than goods. DCTs can either be unconditional or conditional. Under unconditional schemes, cash is directly transferred to eligible households with no conditions. For example, pension schemes. Conditional cash transfers provide cash directly to poor households in response to the fulfillment of certain conditions such as minimum attendance of children in schools. DCTs provide poor families the choice of using the cash as they wish. Having access to cash also relieves some of their financial constraints. Also, DCTs are simpler in design than other subsidy schemes. Even though cash transfer schemes have a high fixed cost of administration when the programme is set up, running costs are far lower (see here, here and here). Presently, the government operates a number of DCT schemes. For example, Janani Suraksha Yojana, Indira Awas Yojana and Dhanalaksmi scheme. In his 2011-12 Budget speech, the then Finance Minister, Pranab Mukherjee, had stated that the government plans to move towards direct transfer of cash subsidy for kerosene, Liquified Petroleum Gas (LPG), and fertilizers. A task force headed by Nandan Nilekani was set up to work out the modalities of operationalising DCT for these items. This task force submitted its report in February 2012. The National Food Security Bill, 2011, pending in Parliament, includes cash transfer and food coupons as possible alternative mechanisms to the Public Distribution System. Key features of Aadhaar The office of Unique Identification Authority of India (UIDAI) was set up in 2009 within the Planning Commission. In 2010, the government later introduced the National Identification Authority of India Bill in Parliament to give statutory status to this office.
For a PRS analysis of the Bill, see here. Aadhaar enabled direct cash transfers Advantages Identification through Aadhaar number: Currently, the recipient has to establish his identity and eligibility many times by producing multiple documents for verification. The verification of such documents is done by multiple authorities. An Aadhaar enabled bank account can be used by the beneficiary to receive multiple welfare payments as opposed to the one scheme, one bank approach, followed by a number of state governments. Elimination of middlemen: The scheme reduces chances of rent-seeking by middlemen who siphon off part of the subsidy. In the new system, the cash shall be transferred directly to individual bank accounts and the beneficiaries shall be identified through Aadhaar. Reduction in duplicate and ghost beneficiaries: The Aadhaar number is likely to help eliminate duplicate cards and cards for non-existent persons or ghost beneficiaries in schemes such as the PDS and MNREGS. Disadvantages Lack of clarity on whether Aadhaar is mandatory: According to UIDAI, it is not mandatory for individuals to get an Aadhaar number. However, it does not prevent any service provider from prescribing Aadhaar as a mandatory requirement for availing services. Therefore, beneficiaries may be denied a service if he does not have the Aadhaar number. It is noteworthy that the new direct cash transfer policy requires beneficiaries to have an Aadhaar number and a bank account. However, many beneficiaries do not yet have either. (Presently, there are 229 million Aadhaar number holders and 147 million bank accounts). Targeting and identification of beneficiaries: According to the government, one of the key reasons for changing to DCT system is to ensure better targeting of subsidies. However, the success of Aadhaar in weeding out ‘ghost’ beneficiaries depends on mandatory enrollment. If enrollment is not mandatory, both authentication systems (identity card based and Aadhaar based) must coexist. In such a scenario, ‘ghost’ beneficiaries and people with multiple cards will choose to opt out of the Aadhaar system. Furthermore, key schemes such as PDS suffer from large inclusion and exclusion errors. However, Aadhaar cannot address errors in targeting of BPL families. Also, it cannot address problems of MNREGS such as incorrect measurement of work and payment delays. Safeguard for maintaining privacy: Information collected when issuing Aadhaar may be misused if safeguards to maintain privacy are inadequate. Though the Supreme Court has included privacy as part of the Right to Life, India does not have a specific law governing issues related to privacy. Also, the authority is required to maintain details of every request for authentication and the response provided. However, maximum duration for which such data has to be stored is not specified. Authentication data provides insights into usage patterns of an Aadhaar number holder. Data that has been recorded over a long duration of time may be misused for activities such as profiling an individual’s behaviour.
Recently, the Indian Railways announced rationalisation of freight fares. This rationalisation will result in an 8.75% increase in freight rates for major commodities such as coal, iron and steel, iron ore, and raw materials for steel plants. The freight rates were rationalised to ensure additional revenue generation across the network. An additional revenue of Rs 3,344 crore is expected from such rationalisation, which will be utilised to improve passenger amenities. In addition, the haulage charge of containers has been increased by 5% and the freight rates of other small goods have been increased by 8.75%. Freight rates have not been increased for goods such as food grains, flours, pulses, fertilisers, salt, and sugar, cement, petroleum, and diesel. In light of this, we discuss some issues around Railways’ freight pricing.
Railways’ sources of internal revenue
Railways earns its internal revenue primarily from passenger and freight traffic. In 2016-17 (latest actual figures available), freight and passenger traffic contributed to about 63% and 28% of the internal revenue, respectively. The remaining is earned from miscellaneous sources such as parcel service, coaching receipts, and platform tickets.
Freight traffic: Railways majorly transports bulk freight, and the freight basket has mostly been limited to include raw materials for certain industries such as power plants, and iron and steel plants. It generates most of its freight revenue from the transportation of coal (43%), followed by cement (8%), food-grains (7%), and iron and steel (7%). In 2018-19, Railways expects to earn Rs 1,21,950 crore from its freight traffic.
Passenger traffic: Passenger traffic is broadly divided into two categories: suburban and non-suburban traffic. Suburban trains are passenger trains that cover short distances of up to 150 km, and help move passengers within cities and suburbs. Majority of the passenger revenue (94% in 2017-18) comes from the non-suburban traffic (or the long-distance trains).
Within non-suburban traffic, second class (includes sleeper class) contributes to 67% of the non-suburban revenue. AC class (includes AC 3-tier, AC Chair Car and AC sleeper) contributes to 32% of the non-suburban revenue. The remaining 1% comes from AC First Class (includes Executive class and First Class).
Railways’ ability to generate its own revenue has been slowing
The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining. This is due to a decline in the growth of both freight and passenger traffic. Some of the reasons for such decline include:
Freight traffic growth has been declining, and is limited to a few items
Growth of freight traffic has been declining over the last few years. It has declined from around 8% in the mid-2000s to a 4% negative growth in mid-2010s, before an estimated recovery to about 5% now.
The National Transport Development Policy Committee (2014) had noted various issues with freight transportation on railways. For example, Indian Railways does not have an institutional arrangement to attract and aggregate traffic of smaller parcel size. Further, freight services are run with a focus on efficiency instead of customer satisfaction. Consequently, it has not been able to capture high potential markets such as FMCGs, hazardous materials, or automobiles and containerised cargo. Most of such freight is transported by roads.
The freight basket is also limited to a few commodities, most of which are bulk in nature. For example, coal contributes to about 43% of freight revenue and 25% of the total internal revenue. Therefore, any shift in transport patterns of any of these bulk commodities could affect Railways’ finances significantly.
For example, if new coal based power plants are set up at pit heads (source of coal), then the need for transporting coal through Railways would decrease. If India’s coal usage decreases due to a shift to more non-renewable sources of energy, it will reduce the amount of coal being transported. Such situations could have a significant adverse impact on Railways’ revenue.
Freight traffic cross-subsidises passenger traffic
In 2014-15, while Railways’ freight business made a profit of about Rs 44,500 crore, its passenger business incurred a net loss of about Rs 33,000 crore.17 The total passenger revenue during this period was Rs 49,000 crore. This implies that losses in the passenger business are about 67% of its revenue. Therefore, in 2014-15, for every one rupee earned in its passenger business, Indian Railways ended up spending Rs 1.67.
These losses occur across both suburban and non-suburban operations, and are primarily caused due to: (i) passenger fares being lower than the costs, and (ii) concessions to various categories of passengers. According to the NITI Aayog (2016), about 77% to 80% of these losses are contributed by non-suburban operations (long-distance trains). Concessions to various categories of passengers contribute to about 4% of these losses, and the remaining (73-76%) is due to fares being lower than the system costs.
The NITI Aayog (2016) had noted that Railways ends up using profits from its freight business to provide for such losses in the passenger segment, and also to manage its overall financial situation. Such cross-subsidisation has resulted in high freight tariffs. The NTDPC (2014) had noted that, in several countries, passenger fares are either higher or almost equal as freight rates. However, in India, the ratio of passenger fare to freight rate is about 0.3.
Impact of increasing freight rates
The recent freight rationalisation further increases the freight rates for certain key commodities by 8.75%, with an intention to improve passenger amenities. Higher freight tariffs could be counter-productive towards growth of traffic in the segment. The NTDPC report had noted that due to such high tariffs, freight traffic has been moving to other modes of transport. Further, the higher cost of freight segment is eventually passed on to the common public in the form of increased costs of electricity, steel, etc. Various experts have recommended that Railways should consider ways to rationalise freight and passenger tariff distortions in a way to reduce such cross-subsidisation.
For a detailed analysis of Railways revenue and infrastructure, refer to our report on ‘State of Indian Railways’.
