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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.
To contain the spread of COVID-19 in India, the central government imposed a nation-wide lockdown on March 24, 2020. Under the lockdown most economic activities, other than those classified as essential activities, were suspended. States have noted that this loss of economic activity has resulted in a loss of income for many individuals and businesses. To allow some economic activities to start, some states have provided relaxations to establishments from their existing labour laws. This blog explains the manner in which labour is regulated in India, and the various relaxations in labour laws that are being announced by various states.
How is labour regulated in India?
Labour falls under the Concurrent List of the Constitution. Therefore, both Parliament and State Legislatures can make laws regulating labour. Currently, there are over 100 state laws and 40 central laws regulating various aspects of labour such as resolution of industrial disputes, working conditions, social security, and wages. To improve ease of compliance and ensure uniformity in central level labour laws, the central government is in the process of codifying various labour laws under four Codes on (i) industrial relations, (ii) occupational safety, health and working conditions, (iii) wages, and (iv) social security. These Codes subsume laws such as the Industrial Disputes Act, 1947, the Factories Act, 1948, and the Payment of Wages Act, 1936.
How do state governments regulate labour?
A state may regulate labour by: (i) passing its own labour laws, or (ii) amending the central level labour laws, as applicable to the state. In cases where central and state laws are incompatible, central laws will prevail and the state laws will be void. However, a state law that is incompatible with central laws may prevail in that state if it has received the assent of the President. For example: In 2014, Rajasthan amended the Industrial Disputes Act, 1947. Under the Act, certain special provisions with regard to retrenchment, lay-off and closure of establishments applied to establishments with 100 or more workers. For example, an employer in an establishment with 100 or more workers required permission from the central or state government prior to retrenchment of workers. Rajasthan amended the Act to increase the threshold for the application of these special provisions to establishments with 300 workers. This amendment to the central law prevailed in Rajasthan as it received the assent of the President.
Which states have passed relaxations to labour laws?
The Uttar Pradesh Cabinet has approved an ordinance, and Madhya Pradesh has promulgated an ordinance, to relax certain aspects of existing labour laws. Further, Gujarat, Rajasthan, Haryana, Uttarakhand, Himachal Pradesh, Assam, Goa, Uttar Pradesh, and Madhya Pradesh have notified relaxations to labour laws through rules.
Madhya Pradesh: On May 6, 2020, the Madhya Pradesh government promulgated the Madhya Pradesh Labour Laws (Amendment) Ordinance, 2020. The Ordinance amends two state laws: the Madhya Pradesh Industrial Employment (Standing Orders) Act, 1961, and the Madhya Pradesh Shram Kalyan Nidhi Adhiniyam, 1982. The 1961 Act regulates the conditions of employment of workers and applies to all establishments with 50 or more workers. The Ordinance increases this threshold to 100 or more workers. Therefore, the Act will no longer apply to establishments with between 50 and 100 workers that were previously regulated. The 1982 Act provides for the constitution of a Fund that will finance activities related to welfare of labour. The Ordinance amends the Act to allow the state government to exempt any establishment or class of establishments from the provisions of the Act through a notification. These provisions include payment of contributions into the Fund by employers at the rate of three rupees every six months.
Further, the Madhya Pradesh government has exempted all new factories from certain provisions of the Industrial Disputes Act, 1947. Provisions related to lay-off and retrenchment of workers, and closure of establishments will continue to apply. However, the other provisions of the Act such as those related to industrial dispute resolution, strikes and lockouts, and trade unions, will not apply. This exemption will remain in place for the next 1,000 days (33 months). Note that the Industrial Disputes Act, 1947 allows the state government to exempt certain establishments from the provisions of the Act as long as it is satisfied that a mechanism is in place for the settlement and investigation of industrial disputes.
Uttar Pradesh
The Uttar Pradesh Cabinet has approved the Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020. According to news reports, the Ordinance seeks to exempt all factories and establishments engaged in manufacturing processes from all labour laws for a period of three years, subject to the fulfilment of certain conditions. These conditions include:
Wages: The Ordinance specifies that workers cannot be paid below minimum wage. Further, workers must be paid within the time limit prescribed in the Payment of Wages Act, 1936. The Act specifies that: (i) establishments with less than 1,000 workers must pay wages before the seventh day after the last day of the wage period and (ii) all other establishments must pay wages before the tenth day after the last day of the wage period. Wages must be paid into the bank accounts of workers.
Health and safety: The Ordinance states that provisions of health and safety specified in the Building and Other Construction Workers Act, 1996 and Factories Act, 1948 will continue to apply. These provisions regulate the usage of dangerous machinery, inspections, and maintenance of factories, amongst others.
Work Hours: Workers cannot be required to work more than eleven hours a day and the spread of work may not be more than 12 hours a day.
Compensation: In the case of accidents leading to death or disability, workers will be compensated as per the Employees Compensation Act, 1923.
Bonded Labour: The Bonded Labour System (Abolition) Act, 1976 will continue to remain in force. It provides for the abolition of the bonded labour system. Bonded labour refers to the system of forced labour where a debtor enters into an agreement with the creditor under certain conditions such as to repay his or a family members debt, due to his caste or community, or due to a social obligation.
Women and children: Provisions of labour laws relating to the employment of women and children will continue to apply.
It is unclear if labour laws providing for social security, industrial dispute resolution, trade unions, strikes, amongst others, will continue to apply to businesses in Uttar Pradesh for the period of three years specified in the Ordinance. Since the Ordinance is restricting the application of central level labour laws, it requires the assent of the President to come into effect.
Changes in work hours
The Factories Act, 1948 allows state governments to exempt factories from provisions related to work hours for a period of three months if factories are dealing with an exceptional amount of work. Further, state governments may exempt factories from all provisions of the Act in the case of public emergencies. The Gujarat, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh, Goa, Assam and Uttarakhand governments passed notifications to increase maximum weekly work hours from 48 hours to 72 hours and daily work hours from 9 hours to 12 hours for certain factories using this provision. Further, Madhya Pradesh has exempted all factories from the provisions of the Factories Act, 1948 that regulate work hours. These state governments have noted that an increase in work hours would help address the shortage of workers caused by the lockdown and longer shifts would ensure fewer number of workers in factories allowing for social distancing to be maintained. Table 1 shows the state-wise increase in maximum work hours.
Table 1: State-wise changes to work hours
|
State |
Establishments |
Maximum weekly work hours |
Maximum daily work hours |
Overtime Pay (2x ordinary wages) |
Time period |
|
All factories |
Increased from 48 hours to 72 hours |
Increased from 9 hours to 12 hours |
Not required |
Three months |
|
|
All factories |
Increased from 48 hours to 72 hours |
Increased from 9 hours to 12 hours |
Required |
Three months |
|
|
All factories distributing essential goods and manufacturing essential goods and food |
Increased from 48 hours to 72 hours |
Increased from 9 hours to 12 hours |
Required |
Three months |
|
|
All factories |
Not specified |
Increased from 9 hours to 12 hours |
Required |
Two months |
|
|
All factories |
Increased from 48 hours to 72 hours |
Increased from 9 hours to 12 hours |
Not required |
Three months* |
|
|
All factories and continuous process industries that are allowed to function by government |
Maximum 6 days of work a week |
Two shifts of 12 hours each. |
Required |
Three months |
|
|
All factories |
Not specified |
Increased from 9 hours to 12 hours |
Required |
Three months |
|
|
Goa |
All factories |
Not specified |
Increased from 9 hours to 12 hours |
Required |
Approximately three months |
|
All factories |
Not specified |
Not specified |
Not specified |
Three months |
Note: *The Uttar Pradesh notification was withdrawn
