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 government's acquisition of land for projects has been facing protests across the country, the violence in Uttar Pradesh being only the latest. What is Land Acquisition? Land acquisition is the process by which the government forcibly acquires private property for public purpose without the consent of the land-owner. It is thus different from a land purchase, in which the sale is made by a willing seller. How is this process governed? Land Acquisition is governed by the Land Acquisition Act, 1894.  The government has to follow a process of declaring the land to be acquired, notify the interested persons, and acquire the land after paying due compensation. Various state legislatures have also passed Acts that detail various aspects of the acquisition process. Land is a state subject.  Why is Parliament passing a law? Though land is a state subject, "acquisition and requisitioning of property" is in the concurrent list. Both Parliament and state legislatures can make laws on this subject. Is there a new Act being proposed? The government had introduced a Bill to amend this Act in 2007. That Bill lapsed in 2009 at the time of the general elections. The government has stated its intent to re-introduce a similar Bill, but has not yet done so. What are the major changes being proposed? There are significant changes proposed in the 2007 Bill with regard to (a) the purpose for which land may be acquired; (b) the amount of compensation to be paid; (c) the process of acquisition; (d) use of the land acquired; and (e) dispute settlement mechanisms. We explain these briefly below. Purpose: Currently, land may be acquired for a range of uses such as village sites, town or rural planning, residential purposes for poor or displaced persons, planned development (education, housing, health, slum clearance), and for state corporations. Land may also be acquired for use by private companies for the above purposes or if the work "is likely to prove useful to the public". The 2007 Bill had a narrower list: (a) for strategic naval, military or air force purposes; (b) for public infrastructure projects; and (c) for any purpose useful to the general public if 70% of the land has been purchased from willing sellers through the free market. Compensation: The current Act requires market value to be paid for the land and any other property on it (buildings, trees, irrigation work etc) as well as expenses for compelling the person change place of residence or business. It explicitly prohibits taking into account the intended use of land while computing market value. The 2007 Bill requires payment of the highest of three items: the minimum value specified for stamp duty, the average of the top 50 per cent by price of land sale in the vicinity, and the average of the top 50 pc of the land purchased for the project from willing sellers. For computing recent land sale, the intended land use is to be used. Thus, agricultural land being acquired for an industrial project will be paid the price of industrial land. Process of acquisition: Several changes are proposed, including the requirement of a social impact assessment. Any project that displaces more than 400 families (200 in hilly, tribal and desert areas) will require an SIA before the acquisition is approved. Use of land acquired: The 2007 Bill requires the land acquired to be used for that purpose within five years. If this condition is not met, the land reverts to the government (it is not returned to the original land owners). If any acquired land is transferred to another entity, 80 pc of the capital gains has to be shared with the original land-owners and their legal heirs. Dispute Settlement: Currently, all disputes are resolved by civil courts, which results in delays. The 2007 Bill sets up Land Acquisition Compensation Dispute Resolution Authority at the state and national levels. These authorities will have the power of civil courts, and will adjudicate disputes related to compensation claims. Does the proposed Bill address the major issues? The Bill narrows the uses for which land may be acquired. It also changes the compensation due and links that to the market price for which land is to be used. There could be significant changes in acquisition for use by private industry. Firstly, they would have to purchase at least 70 pc of the required land from willing sellers (presumably, at fair market price). Second, the compensation amount for the remaining (upto 30 pc of land) could be significantly higher than the current method. This would be at a premium to the average paid to the willing sellers, and it would be based on intended industrial or commercial use which usually commands a higher price than agricultural land. However, the effect on acquisition for projects such as highways and railways will not be significant, as there is no benchmark for price determination for such use. This article appeared in Rediff News on May 12, 2011 and can be accessed here.