Applications for LAMP Fellowship 2025-26 are now open. Apply here. The last date for submitting applications is December 21, 2024
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. 
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 
The 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.
Recently, the Karnataka legislature passed the Bruhat Bengaluru Mahanagara Palike (BBMP) Bill, 2020. BBMP is the municipal corporation of the Greater Bengaluru metropolitan area. The BBMP Act, 2020 seeks to improve decentralisation, ensure public participation, and address certain administrative and structural concerns in Bengaluru. In this blog, we discuss some common issues in urban local governance in India, in the context of Bengaluru’s municipal administration.
The Constitution (74th Amendment) Act, 1992 provided for the establishment of urban local bodies (ULBs) (including municipal corporations) as institutions of local self-government. It also empowered state governments to devolve certain functions, authority, and power to collect revenue to these bodies, and made periodic elections for them compulsory.
Urban governance is part of the state list under the Constitution. Thus, the administrative framework and regulation of ULBs varies across states. However, experts have highlighted that ULBs across India face similar challenges. For instance, ULBs across the country lack autonomy in city management and several city-level functions are managed by parastatals (managed by and accountable to the state). Several taxation powers have also not been devolved to these bodies, leading to stressed municipal finances. These challenges have led to poor service delivery in cities and also created administrative and governance challenges at the municipal level.
BBMP was established under the Karnataka Municipal Corporation Act, 1976 (KMC Act). The BBMP Act, 2020 replaces provisions of the KMC Act, 1976 in its application to Bengaluru. It adds a new level of zonal committees to the existing three-tier municipal structure in the city, and also gives the Corporation some more taxation powers. Certain common issues in urban local governance in India, with provisions related to them in the BBMP Act, 2020 are given below.
Functional overlap with parastatals for key functions
The Constitution (74th Amendment) Act, 1992 empowered states to devolve the responsibility of 18 functions including urban planning, regulation of land use, water supply, and slum upgradation to ULBs. However, in most Indian cities including Bengaluru, a majority of these functions are carried out by parastatals. For example, in Bengaluru, the Bengaluru Development Authority is responsible for land regulation and the Karnataka Slum Clearance Board is responsible for slum rehabilitation.
The BBMP Act, 2020 provides the Corporation with the power and responsibility to prepare and implement schemes for the 18 functions provided for in the Constitution (74th Amendment) Act, 1992. However, it does not provide clarity if new bodies at the municipal level will be created, or the existing parastatals will continue to perform these functions and if so, whether their accountability will shift from the state to the municipal corporation.
This could create a two-fold challenge in administration. First, if there are multiple agencies performing similar functions, it could lead to a functional overlap, ambiguity, and wastage of resources. Second, and more importantly, the presence of parastatals that are managed by and accountable to the state government leads to an erosion of the ULB’s autonomy. Several experts have highlighted that this lack of autonomy faced by municipal corporations in most Indian cities leads to a challenge in governance, effective service delivery, and development of urban areas.
An Expert Committee on Urban Infrastructure (2011) had recommended that activity mapping should be done for the 18 functions. Under this, functions in the exclusive domain of municipalities and those which need to be shared with the state and the central government must be specified. Experts have also recommended that the municipality should be responsible for providing civic amenities in its jurisdiction and if a parastatal exercises a civic function, it should be accountable to the municipality.
Stressed municipal finances
Indian ULBs are amongst the weakest in the world in terms of fiscal autonomy and have limited effective devolution of revenue. They also have limited capacity to raise resources through their own sources of revenue such as property tax. Municipal revenue in India accounts for only one percent of the GDP (2017-18). This leads to a dependence on transfers by the state and central government.
ULBs in states like Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Rajasthan, and Haryana are in poor financial condition. This has been attributed to limited powers to raise revenue and levy taxes, and problems in the management of existing resources. For instance, the finances of Bihar’s ULBs were assessed to be poor because of: (i) delays in release of grants, (ii) inadequate devolution of funds, and (iii) delays in revision of tax rates and assessments of landholdings.
In comparison, Karnataka ranks high among Indian states in key indicators for fiscal capacity like collection of property taxes, grants from Central Finance Commissions, and state government transfers. The BBMP Act, 2020 further increases the taxation powers of the Corporation, by allowing it to impose taxes on professions and entertainment.
Experts have recommended that the central government and the respective state government should provide additional funds and facilitate additional funding mechanisms for ULBs to strengthen their finances. The revenue of ULBs can be augmented through measures including assignment of greater powers of taxation to the ULBs by the state government, reforms in land and property-based taxes (such as the use of technology to cover more properties), and issuing of municipal bonds (debt instruments issued by ULBs to finance development projects).
Powers of elected municipal officials
The executive power with state-appointed municipal Commissioners and elected municipal officers differs across states. States like Tamil Nadu and Gujarat, and cities like Chennai and Hyderabad vest the executive power in the Commissioner. In contrast, the executive power of the Corporation is exercised by a Mayor-in council (consisting of the Mayor and up to 10 elected members of the Corporation) in Kolkata and Madhya Pradesh. This is unlike large metropolitan cities in other countries like New York and London, where elected Mayors are designated as executive heads. Experts have noted that charging Commissioners with executive power diluted the role of the Mayor and violated the spirit of self-governance.
Under the BBMP Act, 2020, both the elected Mayor and the state-appointed Chief Commissioner exercise several executive functions. The Mayor is responsible for approving contracts and preparing the budget estimate for the Corporation. He is also required to discharge all functions assigned to him by the Corporation. On the other hand, executive functions of the Chief Commissioner include: (i) selling or leasing properties owned by the Corporation, and (ii) regulating and issuing instructions regarding public streets.
The Expert Committee on Urban Infrastructure (2011) has recommended that the Commissioner should act as a city manager and should be recruited through a transparent search-cum-selection process led by the Mayor. A Model Municipal law, released by the Urban Development Ministry in 2003, provided that the executive power should be exercised by an Empowered Standing Committee consisting of the Mayor, Deputy Mayor, and seven elected councillors.
Management of staff and human resources
Experts have noted that municipal administration in India suffers from staffing issues which leads to a failure in delivering basic urban services. These include overstaffing of untrained manpower, shortage of qualified technical staff and managerial supervisors, and unwillingness to innovate in methods for service delivery.
The BBMP Act, 2020 provides that the Corporation may make bye-laws for the due performance of duties by its employees. However, it does not mention other aspects of human resource management such as recruitment and promotion. A CAG report (2020) looking at the implementation of the Constitution (74th Amendment) Act, 1992 in Karnataka has observed that the power to assess municipal staff requirements, recruiting such staff, and determining their pay, transfer and promotion vests with the state government. This is in contrast with the recommendations of several experts who have suggested that municipalities should appoint their personnel to ensure accountability, adequate recruitment, and proper management of staff.
Other states including Kerala, Maharashtra and Tamil Nadu also allow the state governments to regulate recruitment and staffing for ULBs. In cities like Mumbai, and Coimbatore, and some states like Gujarat and Madhya Pradesh, while the recruitment process is conducted by the respective municipal corporations, the final sanction for hiring staff lies with the state government.
