Earlier today, the Union Cabinet announced the merger of the Railways Budget with the Union Budget.  All proposals under the Railways Budget will now be a part of the Union Budget.  However, to ensure detailed scrutiny, the Ministry’s expenditure will be discussed in Parliament.  Further, Railways will continue to maintain its autonomy and financial decision making powers.  In light of this, this post discusses some of the ways in which Railways is financed, and issues it faces with regard to financing. Separation of Railways Budget and its financial implications The Railways Budget was separated from the Union Budget in 1924.  While the Union Budget looks at the overall revenue and expenditure of the central government, the Railways Budget looks at the revenue and expenditure of the Ministry of Railways.  At that time, the proportion of Railways Budget was much higher as compared to the Union Budget.  The separation of the Budgets was done to ensure that the central government receives an assured contribution from the Railways revenues.  However, in the last few years, Railways’ finances have deteriorated and it has been struggling to generate enough surplus to invest in improving its infrastructure. Indian Railways is primarily financed through budgetary support from the central government, its own internal resources (freight and passenger revenue, leasing of railway land, etc.), and external resources (market borrowings, public private partnerships, joint ventures, or market financing). Every year, all ministries, except Railways, get support from the central government based on their estimated revenue and expenditure for the year.  The Railways Ministry is provided with a gross budgetary support from the central government in order to expand its network.  However, unlike other Ministries, Railways pays a return on this investment every year, known as dividend.  The rate of this dividend is currently at around 5%, and also includes the interest on government budgetary support received in the previous years. Various Committees have observed that the system of receiving support from the government and then paying back dividend is counter-productive.  It was recommended that the practice of paying dividend can be avoided until the financial health of Railways improves.  In the announcement made today, the requirement to pay dividend to the central government has been removed.  This would save the Ministry from the liability of paying around Rs 9,700 crore as dividend to the central government every year.  However, Railways will continue to get gross budgetary support from the central government. Declining internal revenue In addition to its core business of providing transportation, Railways also has several social obligations such as: (i) providing certain passenger and coaching services at below cost fares, (ii) running uneconomic branch lines (connectivity to remote areas), and (iii) granting concessions to various categories of people (like senior citizens, children, etc.).  All these add up to about Rs 30,000 crore.  Other inelastic expenses of Railways include pension charges, fuel expenses, lease payments, etc.  Such expenses do not leave any financial room for the Railways to make any infrastructure investments. Railways1 In the last few years, Railways has been struggling due to a decline in its revenue from passenger and freight traffic.  In addition, the support from the central government has broadly remained constant. In 2015-16, the gross budgetary support and internal revenue saw a decline, while there was some increase in the extra budgetary resources (shown in Figure 1).   Railways’ internal revenue primarily comes from freight traffic (about 65%), followed by passenger traffic (about 25%).  About one-third of the passenger revenue comes from first class passenger traffic and the remaining two-third comes from second class passenger traffic.  In 2015-16, Railways passenger traffic decreased by 4% and total passenger revenue decreased by 10% from the budget estimates.  While revenue from second class saw a decrease of 13%, revenue from first class traffic decreased by 3%.  In the last few years, Railways’ internal sources have been declining, primarily due to a decline in both passenger as well as freight traffic. Freight traffic Railways2The share of Railways in total freight traffic has declined from 89% to 30% over the last 60 years, with most of the share moving towards roads (see Figure 2).  With regard to freight traffic, Railways generates most of its revenue from the transportation of coal (about 44%), followed by cement (8%), iron ore (7%), and food-grains (7%).  In 2015-16, freight traffic decreased by 10%, and freight earnings reduced by 5% from the budget estimates. The Railways Budget for 2016-17 estimates an increase of 12% in passenger revenue and a 0.26% increase in passenger traffic.  Achieving a 12% increase in revenue without a corresponding increase in traffic will require an increase in fares. Flexi fares and passenger traffic A few days ago, the Ministry of Railways introduced a flexi-fare system for certain categories of trains.  Under this system, the base fare for Rajdhani, Duronto and Shatabdi trains will increase by 10% with every 10% of berths sold, subject to a ceiling of up to 1.5 times the base fare.  While this could also be a way for Railways to improve its revenue, it has raised concerns about train fares becoming more expensive.  Note that the flexi-fare system will apply only to first class passenger traffic, which contributes to about 8% of the total Railways revenue.  It remains to be seen if the new system increases Railways revenue, or further decreases passenger traffic (people choosing other modes of travel, such as airways, if fares increase significantly). While the Railways is trying to improve revenue by raising fares, this may increase the financial burden on passengers.  In the past, various Parliamentary Committees have observed that the investment planning in Railways from the government’s side is politically driven rather than need driven.  This has resulted in the extension of uneconomic, un-remunerative, yet socially desirable projects in every budget.  It has been recommended that projects based on social and commercial considerations must be categorised separately in the Railways accounts, and funding for the former must come from the central or state governments.  It has also been recommended that Railways should bring in more accuracy in determining its public service obligations. The decision to merge the Railways Budget with the Union Budget seems to be on the lines of several of these recommendations.  However, it remains to be seen whether merging the Railway Budget with the Union Budget will  improve the transporter’s finances or if it would require bringing in more reforms.

 

 

The President addressed the Parliament on 12 March 2012.  Below are some items from the agenda of the central government as outlined in the speech. Legislation

  • A Bill to eliminate manual scavenging and insanitary latrines shall be introduced in Parliament.
  • New legislation is being considered for persons with disabilities, in order to replace the existing Act.
  • A Bill to provide for a uniform regulatory environment to protect consumer interests, enable speedy adjudication and ensure growth of the real estate sector shall be introduced.
  • A Bill to create a Civil Aviation Authority to ensure safe and affordable air services will be introduced this year.
  • The government is working on legislation for safeguarding and promoting the livelihoods of street vendors.
  • Amendments shall be made to the Child Labour (Prohibition and Regulation) Act to prohibit employment of children less than 14 years of age.
  • Government will aim for early enactment of the Land Acquisition, Rehabilitation and Resettlement Bill.

Workforce Development

  • 1500 new Industrial Training Institutes and 5000 Skill Development Centres shall be set up.  Skill training will be provided to 85 lakh people during 2012-13 and to 800 lakh people during the 12th Plan.
  • A National Mission for Teachers shall be established to improve teacher education and faculty development .
  • The National Urban Livelihoods Mission shall be launched for large-scale skill upgradation, entrepreneurship development and providing wage employment and self-employment opportunities.
  • The expenditure on Research & Development shall be increased from 1 percent to 2 percent of GDP.
  • A Higher Education Credit Guarantee Authority shall be set up in order to provide limited credit guarantees through risk pooling for educational loans.

Health

  • The government will increase national Plan and Non-Plan public expenditure on health to 2.5 percent of GDP by the end of the 12th Plan.
  • The National Rural Health Mission will be converted to a National Health Mission during the 12th Plan, which will also cover urban areas.  Around 7 crore families will be provided health insurance cover under the Rashtriya Swasthya Bima Yojana by the end of the 12th Plan.
  • A Multi-sectoral Nutrition Programme will be launched in 200 districts for maternal and child nutrition needs.
  • A Department for Disability Affairs and the National Council for Senior Citizens shall be set up.

Economy

  • Steps will be taken to reduce the gap of 10 million hectares between irrigation potential created and realized.
  • A scheme for Minimum Support Price for minor forest produce is being considered.
  • A roadmap to double merchandise exports to US$ 500 billion by 2013-14 has been prepared.
  • Public sector banks shall be recapitalized to maintain their financial health.
  • A scheme for promotion of the capital goods industry will be launched during the 12th Plan.
  • Rs 17,500 crore shall be provided to the Delhi Mumbai Industrial Corridor for infrastructure projects.
  • The National Electricity Fund shall be set up to provide interest subsidy on loans disbursed to State Power Utilities.
  • Installed capacity of nuclear plants shall be increased to 10,080 MW from 4,780 MW by the end of the 12th Plan.