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.

On June 6, 2022, the Ministry of Electronics and Information Technology released the draft amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (IT Rules, 2021) for public feedback.  The IT Rules were notified on February 25, 2021, under the Information Technology Act, 2000 (IT Act).  The Ministry noted that there is a need to amend the Rules to keep up with the challenges and gaps emerging in an expanding digital ecosystem.  In this blog post, we give a brief background to the IT Rules, 2021 and explain the key proposed changes to the Rules.

Background to the IT Rules, 2021

The IT Act exempts intermediaries from liability for user-generated content on their platform provided they meet certain due diligence requirements.  Intermediaries are entities that store or transmit data on behalf of other persons and include telecom and internet service providers, online marketplaces, search engines, and social media sites.  IT Rules specify the due diligence requirements for the intermediaries.  These include: (i) informing users about rules and regulations, privacy policy, and terms and conditions for usage of its services, including types of content which are prohibited, (ii) expeditiously taking down content upon an order from the government or courts, (iii) providing a grievance redressal mechanism to resolve complaints from users about violation of Rules, and (iv) enabling identification of the first originator of the information on its platform under certain conditions.  It also specifies a framework for content regulation of online publishers of news and current affairs and curated audio-visual content.  For an analysis of the IT Rules 2021 please see here.

Key changes proposed to the IT Rules 2021

Key changes proposed by the draft amendments are as follows:

  • Obligations of intermediaries:  The 2021 Rules require the intermediary to “publish” rules and regulations, privacy policy and user agreement for access or usage of its services.   The Rules specify restrictions on the types of content that users are allowed to create, upload, or share.  The Rules require intermediaries to “inform” users about these restrictions.  Proposed amendments seek to expand the obligation on intermediaries to include: (i) “ensuring compliance” with rules and regulations, privacy policy, and user agreement, and (ii) "causing users to not" create, upload, or share prohibited content.
     
  • The proposed amendments also add that intermediaries should take all reasonable measures to ensure accessibility of their services to all users, with a reasonable expectation of due diligence, privacy, and transparency.   Further, intermediaries should respect the constitutional rights of all users.  The Ministry observed that such a change was necessary as several intermediaries have acted in violation of the constitutional rights of citizens.
     
  • Appeal mechanism against decisions of grievance officers:  The 2021 Rules require intermediaries to designate a grievance officer to address complaints regarding violations of the Rules.  The Ministry observed that there have been instances where these officers do not address the grievances satisfactorily or fairly.  A person aggrieved with the decision of the grievance officer needs to approach courts to seek redressal.  Hence, the draft amendments propose an alternative mechanism for such appeals.  A Grievance Appellate Committee will be formed by the central government to hear appeals against the decisions of grievance officers.  The Committee will consist of a chairperson and other members appointed by the central government through a notification.  The Committee is required to dispose of such appeals within 30 days from the date of receipt.  The concerned intermediary must comply with the order passed by the Committee.  Note that the proposed amendments do not restrict users from directly approaching courts.
  • Expeditious removal of prohibited content:  The 2021 Rules require intermediaries to acknowledge complaints regarding violation of Rules within 24 hours, and dispose of complaints within 15 days.  The proposed amendments add that the complaints concerning the removal of prohibited content must be addressed within 72 hours.  The Ministry observed that given the potential for virality of content over internet, a stricter timeline will help in removing prohibited content expeditiously.

Comments on the draft amendments are invited until July 6, 2022.