Sakshi of PRS Legislative Research discusses the government's ordinance-making power in the context of the National Food Security Ordinance in an Indian Express opinion editorial. On Wednesday, the Union cabinet approved the food security ordinance. The government has already introduced a National Food Security Bill in Parliament in December 2011. Parliamentary consideration on the bill has been initiated with the standing committee submitting its recommendations and the government proposing amendments to the law. After being listed on several occasions for discussion, members of Parliament began debating the bill in the last few days of the 2013 budget session. In spite of all this, the government has chosen to promulgate an ordinance. In all likelihood, Parliament will reconvene in a few weeks for the monsoon session. In this context, it would be useful to understand the ordinance-making power of government and its usage in the recent past. Under the Constitution, the power to make laws rests with the legislature. The executive has been given the power to make laws when Parliament is not in session and "immediate action" is necessary. In such scenarios, the president can issue an ordinance on the advice of the executive, to have the same effect as an act of Parliament. In the 1980s, the Supreme Court was confronted with a case where a state government repeatedly re-promulgated ordinances that had lapsed in previous assembly sessions. This led the SC to examine the ordinance-making power of government. The SC reasserted the constitutional principle that the primary law-making power rests with the legislature and not the executive. The executive is only given the legislative power to issue an ordinance to meet an "emergent situation". Such a situation arose in 2011 when, given that students were awaiting their degrees on the completion of their course, the government issued an ordinance to grant IIIT-Kancheepuram the status of an institute of national importance so that students could be awarded their degrees. Data over the last 60 years indicates that the highest number of ordinances, 34, were passed in 1993. Over the 15th Lok Sabha (2009-2013), there have been 16 ordinances, indicating a decline in the number of ordinances being issued every year. Once an ordinance is framed, it is to be laid before Parliament within six weeks of its first sitting. Parliament is empowered to either choose to pass the ordinance as law or let it lapse. Once the ordinance is laid in Parliament, the government introduces a bill addressing the same issue. This is typically accompanied by a memorandum tabled by the government, explaining the emergent circumstances that required the issue of an ordinance. Thereafter, the bill follows the regular law-making process. If Parliament does not approve the ordinance, it ceases to exist. The drafters of the Constitution created this check on the law-making power of the executive to reinforce the notion that law-making will remain the prerogative of the legislature. Earlier this year, in the aftermath of the Delhi gangrape, public pressure led the government to appoint a three-member committee under the late Justice J.S. Verma to suggest changes to laws relating to crimes against women. An amendment bill had already been pending in Parliament. In spite of this, the government brought in the Criminal Law Ordinance, giving effect to some of the committee's recommendations. Once Parliament reconvened, the government introduced a fresh bill replacing the ordinance, seeking to create more stringent provisions on matters related to sexual offences. It passed muster in both Houses. While the Criminal Law Ordinance is an illustration of an ordinance successfully passing through Parliament, there are examples of ordinances that have lapsed because they were not approved by Parliament. In 2004, a week after the winter session ended, the government issued an ordinance to give the Pension Fund Regulatory and Development Authority statutory powers as a regulator. Due to political opposition, the ordinance lapsed and, subsequently, the bill lapsed at the end of the 14th Lok Sabha. The government re-introduced it as a bill in 2011, which is currently pending in Parliament. Although the government has used its power to issue a food security ordinance, the law guaranteeing this right will have to stand scrutiny in Parliament. What remains to be seen is how Parliament debates the right to food in the upcoming monsoon session. That should give us some food for thought. For an analysis of the National Food Security Bill, refer to Sakshi's blog post here.

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.

Railways fig1

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.

Figure 2_Railways

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.

Fig 3_Railways

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.