In light of the COVID-19 pandemic, all passenger trains were suspended till April 14, 2020.  However, goods services have been continuing with trains carrying essential commodities to various parts of the country.   Railways has also made railway parcel vans available for quick mass transportation for e-commerce entities and other customers including state governments to transport certain goods.   These include medical supplies, medical equipment, food, etc. in small parcel sizes.  Besides these, Railways has taken several other actions to provide help during the pandemic. 

Since the travel ban extends from March 23 till April 14, 2020 (and may extend further), it will impact Railways’ finances for both 2019-20 and 2020-21.  In this post, we discuss the situation of Railways’ finances, and what could be the potential impact of the travel ban on Railways’ revenues.  

Impact of the travel ban on Railways’ internal revenue

Railways generates internal revenue primarily from passenger and freight traffic.  In 2018-19 (latest actuals), freight and passenger traffic contributed to about 67% and 27% of the internal revenue respectively.  The remaining is earned from other miscellaneous sources such as parcel service, coaching receipts, and sale of platform tickets.  In 2020-21, Railways expects to earn 65% of its internal revenue from freight and 27% from passenger traffic.  

Passenger traffic:   In 2020-21, Railways expects to earn Rs 61,000 crore from passenger traffic, an increase of 9% over the revised estimates of 2019-20 (Rs 56,000 crore).  

As per numbers provided by the Ministry of Railways, up to February 2020, passenger revenue was approximately Rs 48,801 crore.  This is Rs 7,199 crore less than the 2019-20 revised estimates for passenger revenue, implying that this much amount will have to be generated in March 2020 to meet the revised estimate targets (13% of the year’s target).  However, the average passenger revenue in 2019-20 (for the 11 months) has been around Rs 4,432 crore.  Note that in March 2019 passenger revenue was Rs 4,440 crore.  With passenger travel completely banned since March 23, Railways will fall short of its target for passenger revenue in 2019-20.

As of now, it is unclear when travel across the country will resume to business as usual.  Some states have started extending the lockdown within their state.  In such a situation, the decline in passenger revenue could last longer than these three weeks of lockdown. 

Freight traffic:   In 2020-21, Railways expects to earn Rs 1,47,000 crore from goods traffic, an increase of 9% over the revised estimates of 2019-20 (Rs 1,34,733 crore).   

As per numbers provided by the Ministry of Railways, up to February 2020, freight revenue was approximately Rs 1,08,658 crore.  This is Rs 26,075 crore less than the 2019-20 revised estimates for freight revenue.  This implies that Rs 26,075 crore will have to be generated by freight traffic in March 2020 to meet the revised estimate targets (19% of the year’s target).   However, the average freight revenue in 2019-20 (for the 11 months) has been around Rs 10,029 crore.  Note that in March 2019, freight revenue was Rs 16,721 crore.  

While passenger traffic has been completely banned, freight traffic has been moving.  Transportation of essential goods, and operations of Railways for cargo movement, relief and evacuation and their related operational organisations has been allowed under the lockdown.  Several goods carried by Railways (coal, iron-ore, steel, petroleum products, foodgrains, fertilisers) have been declared to be essential goods.  Railways has also started operating special parcel trains (to carry essential goods, e-commerce goods, etc.) since the lockdown.  These activities will help continue the generation of freight revenue. 

However, some goods that Railways transports, such as cement which contributes to about 8% of Railways’ freight revenue, have not been classified as essential goods.  Railways has also relaxed certain charges levied on freight traffic.  It remains to be seen if Railways will be able to meet its targets for freight revenue.  

Figure 1: Share of freight volume and revenue in 2018-19 (in %)

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Sources: Expenditure Profile, Union Budget 2020-21; PRS.  

Freight has been cross-subsidising passenger traffic; it may worsen this year

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.  With the ban on passenger travel and if the lockdown (in some form) were to continue, passenger operations will face more losses.  This may increase the cross-subsidy burden on freight.  Since Railways cannot increase freight charges any further, it is unclear how such cross-subsidisation would work. 

For example, in 2017-18, passenger and other coaching services incurred losses of Rs 37,937 crore, whereas freight operations made a profit of Rs 39,956 crore.   Almost 95% of profit earned from freight operations was utilised to compensate for the loss from passenger and other coaching services.  The total passenger revenue during this period was Rs 46,280 crore.  This implies that losses in the passenger business are about 82% of its revenue.  Therefore, in 2017-18, for every one rupee earned in its passenger business, Indian Railways ended up spending Rs 1.82.  

Railways expenditure 

While the travel ban has meant that Railways cannot run all its services, it still has to incur much of its operating expenditure.  Staff wages and pension have to be paid and these together comprise 66% of the Railways’ revenue expenditure.  Between 2015 and 2020 (budget estimate), Railways’ expenditure on salary has grown at an average annual rate of 13%.  

About 18% of the revenue expenditure is on fuel expenses, but that may see some decline due to a fall in oil prices.  Railways will also have to continue spending on maintenance, safety and depreciation as these are long-term costs that cannot be done away with.  In addition, regular maintenance of rail infrastructure will be necessary for freight operations.  

Revenue Surplus and Operating Ratio could further worsen

Railways’ surplus is calculated as the difference between its total internal revenue and its revenue expenditure (this includes working expenses and appropriation to pension and depreciation funds).  Operating Ratio is the ratio of the working expenditure (expenses arising from day-to-day operations of Railways) to the revenue earned from traffic.  Therefore, a higher ratio indicates a poorer ability to generate a surplus that can be used for capital investments such as laying new lines, or deploying more coaches.  A decline in revenue surplus affects Railways’ ability to invest in its infrastructure.  

In the last decade, Railways has struggled to generate a higher surplus.  Consequently, the Operating Ratio has consistently been higher than 90% (see Figure 2).  In 2018-19, the ratio worsened to 97.3% as compared to the estimated ratio of 92.8%.   The CAG (2019) had noted that if advances for 2018-19 were not included in receipts, the operating ratio for 2017-18 would have been 102.66%.

In 2020-21, Railways expects to generate a surplus of Rs 6,500 crore, and maintain the operating ratio at 96.2%.   With revenue generation getting affected due to the lockdown, this surplus may further decline, and the operating ratio may further worsen.  

Figure 2: Operating Ratio 

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Note: RE – Revised Estimates, BE – Budget Estimates.
Sources:  Expenditure Profile, Union Budget 2020-21; PRS.  

Other sources of revenue

Besides its own internal resources, Railways has two other primary sources of financing: (i) budgetary support from the central government, and (ii) extra-budgetary resources (primarily borrowings but also includes institutional financing, public-private partnerships, and foreign direct investment).  

Budgetary support from central government:  The central government supports Railways to expand its network and invest in capital expenditure.  In 2020-21, the gross budgetary support from the central government is proposed at Rs 70,250 crore.  This is 3% higher than the revised estimates of 2019-20 (Rs 68,105 crore).  Note that with government revenue also getting affected due to the COVID pandemic, this amount may also change during the course of the year. 

Borrowings:  Railways mostly borrows funds through the Indian Railways Finance Corporation (IRFC).  IRFC borrows funds from the market (through taxable and tax-free bond issuances, term loans from banks and financial institutions), and then follows a leasing model to finance the rolling stock assets and project assets of Indian Railways.

In the past few years, Railways’ borrowings have increased sharply to bridge the gap between the available resources and expenditure.  Earlier, majority of the Railways’ capital expenditure used to be met from the budgetary support from central government.  In 2015-16, this trend changed with the majority of Railways’ capital expenditure being met through extra budgetary resources (EBR).   In 2020-21, Rs 83,292 crore is estimated to be raised through EBR, which is marginally higher than the revised estimates of 2019-20 (Rs 83,247 crore).  

Note that both these sources are primarily used to fund Railways’ capital expenditure.  Some part of the support from central government is used to reimburse Railways for the operating losses made on strategic lines, and for the operational cost of e-ticketing to IRCTC (Rs 2,216 crore as per budget estimates of 2020-21).  

If Railways’ revenue receipts decline this year, it may require additional support from the central government to finance its revenue expenditure, or finance it through its borrowings.  However, an increased reliance on borrowings could further exacerbate the financial situation of Railways.  In the last few years, there has been a decline in the growth of both rail-based freight and passenger traffic (see Figure 3) and this has affected Railways’ earnings from its core business.  A decline in growth of revenue will affect the transporter’s ability to pay off its debt in the future. 

Figure 3: Volume growth for freight and passenger (year-on-year)

 

Note: RE – Revised Estimates; BE – Budget Estimates. 
Sources:  Expenditure Profile, Union Budget 2020-21; PRS.  

Social service by Railways

Besides running freight trains, Railways has also been carrying out several other functions, to help deal with the pandemic.  For example, Railways’ manufacturing capacity is being harnessed to help deal with COVID-19.  Production facilities available with Railways are being used to manufacture items like PPE gear.  Railways has also been exploring how to use its existing manufacturing facilities to produce simple beds, medical trolleys, and ventilators.  Railways has also started providing bulk cooked food to needy people at places where IRCTC base kitchens are located.   The transporter also opened up its hospitals for COVID patients.  

As on April 6, 2,500 rail coaches had been converted as isolation coaches.  On average, 375 coaches are being converted in a day, across 133 locations in the country. 

Considering that railways functions as a commercial department under the central government, the question is whether Railways should bear these social costs.  The NITI Aayog (2016) had noted that there is a lack of clarity on the social and commercial objectives of Railways.  It may be argued that such services could be considered as a public good during a pandemic.  However, the question is who should bear the financial burden of providing such services?  Should it be Indian Railways, or should the central or state government provide this amount through an explicit subsidy?  

For details on the number of daily COVID cases in the country and across states, please see here.  For details on the major COVID related notifications released by the centre and the states, please see here.  For a detailed analysis of the Railways’ functioning and finances, please see here, and to understand this year’s Railways budget numbers, see here.

In the past few months, retail prices of petrol and diesel have consistently increased to all-time high levels.  On October 16, 2021, the retail price of petrol in Delhi was Rs 105.5 per litre, and that of diesel was Rs 94.2 per litre.  In Mumbai, these prices were even higher at Rs 111.7 per litre and Rs 102.5 per litre, respectively.

The difference in fuel retail prices in the two cities is due to the different tax rates levied by the respective state governments on the same products.  In this blog post, we look at the tax components in the price structure of petrol and diesel, the variation in these across states, and the major changes in taxation of these products in the recent years.  We also discuss changes in the retail prices over the past few years and how it compares vis-à-vis the global crude oil prices.

Taxes make up around 50% of the retail price

Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil.  The price charged to dealers includes the base price set by OMCs and the freight price.   As on October 16, 2021, the price charged to dealers makes up 42% of the retail price in the case of petrol, and 49% of the retail price in the case of diesel (Table 1).

The break-up of retail prices of petrol and diesel in Delhi (as on October 16, 2021), shows that around 54% of the retail price of petrol comprises central and states taxes.  In the case of diesel, this is close to 49%.  The central government taxes the production of petroleum products, while states tax their sale.  The central government levies an excise duty of Rs 32.9 per litre on petrol and Rs 31.8 per litre on diesel.  These make up 31% and 34% of the current retail prices of petrol and diesel, respectively.

Table 1: Break-up of petrol and diesel retail prices in Delhi (as on October 16, 2021)

Component

Petrol

Diesel

Rs/litre

% of retail price

Rs/litre

% of retail price

Price Charged to Dealers

44.4

42%

46.0

49%

Excise Duty (levied by centre)

32.9

31%

31.8

34%

Dealer Commission (average)

3.9

4%

2.6

3%

Sales Tax/ VAT (levied by state)

24.3

23%

13.8

15%

Retail Price

105.5

100%

94.2

100%

Note: Delhi levies 30% VAT on petrol and 16.75% VAT on diesel. 
Sources: Indian Oil Corporation Limited; PRS.

While excise duty rates are uniform across the country, states levy sales tax/ Value Added Tax (VAT) which varies across states.  For instance, Odisha levies 32% VAT on petrol, while Uttar Pradesh levies 26.8% VAT or Rs 18.74 per litre, whichever is higher.   Refer to the table 3 in annexure for sales taxes/VAT levied across the country.  The figure below shows the different tax rates levied by states on petrol and diesel.  In addition to the tax rates shown in the graph, many state governments, such as Tamil Nadu, also levy certain additional levies such as cess (Rs 11.5 per litre).

Figure 1: Sales tax/VAT rates levied by states on petrol and diesel (as on October 1, 2021)

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Note: The rates shown for Maharashtra are averages of the rates levied in the Mumbai-Thane region and in the rest of the state. Only percentages are being shown in this graph. 
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Note that unlike excise duty, sales tax is an ad valorem tax, i.e., it does not have a fixed value, and is charged as a percentage of the price of the product.  This implies that while the value of excise duty component of the price structure is fixed, the value of the sales tax component is dependent on the other three components, i.e., price charged to dealers, dealer commission, and excise duty.

Retail prices in India compared to global crude oil price

India’s dependence on imports for consumption of petroleum products has increased over the years.  For instance, in 1998-99, net imports of petroleum products were 69% of the total consumption, which increased to around 95% in 2020-21.  Because of a large share of imports in the domestic consumption, any change in the global price of crude oil has a significant impact on the domestic prices of petroleum products.  The two figures below show the trend in the price of global crude oil and retail prices of petrol and diesel in India, over the last nine years.

Figure 2: Trend of the global crude oil price vis-à-vis retail prices of petrol and diesel (in Delhi)

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Note: Global Crude Oil Price is for the Indian basket.   Petrol and diesel retail prices are for Delhi.  Figures reflect average monthly price.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Between June 2014 and October 2018, the retail selling prices did not adhere to change in global crude oil prices.  The global prices fell sharply between June 2014 and January 2016, and then subsequently increased between February 2016 and October 2018.  However, the retail selling prices remained stable during the entire period.  This disparity in the change in global and Indian retail prices was because of the subsequent changes in taxes.  For instance, central taxes were increased by Rs 11 and 13 between June 2014 and January 2016 on petrol and diesel respectively.  Subsequently, taxes were decreased by four rupees between February 2016 and October 2018 for petrol and diesel.  Similarly, during January-April 2020, following a sharp decline of 69% in the global crude oil prices, the central government increased the excise duty on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively in May 2020. 

Sharp increase in excise duty collections

As a result of the increase in excise duty in May 2020, the excise duty collection increased sharply from Rs 2.38 lakh crore in 2019-20 to Rs 3.84 lakh crore in 2020-21.  The year-on-year growth rate of excise duty collection increased from 4% in 2019-20 to 67% in 2020-21.  However, sales tax collections (from petroleum products) during that period remained more or less constant (Figure 3).  

Figure 3: Excise duty and sales tax/ VAT collection from petroleum products (in Rs lakh crore) 

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Note: The excise duty component in the figure includes cess on crude oil.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Share of states in excise duty has decreased over the years

Though central taxes (such as excise duty) are levied by the centre, it has only 59% of the revenue from these taxes.  The remaining 41% of the revenue is required to be devolved to the state governments as per the recommendations of the 15th Finance Commission.  These devolved taxes are un-tied in nature, states can spend them according to their own discretion.  The excise duty levied on petrol and diesel consists of two broad components: (i) tax component (i.e., basic excise duty), and (ii) cess and surcharge component.  Of this, only the revenue generated from the tax component is devolved to states.  Revenue generated by the centre from any cess or surcharge is not devolved to states.  Currently, the Agriculture Infrastructure and Development Cess, and the Road and Infrastructure Cess are levied on the sale of petrol and diesel in addition to the surcharge.  

In the Union Budget 2021-22, the Agriculture Infrastructure and Development cess on petrol and diesel was announced at Rs 2.5 per litre and Rs 4 per litre, respectively.  However, simultaneously, the basic excise duty and surcharge were reduced by equal amounts, so that the overall rate remains the same.  Essentially, this provision shifted a revenue of Rs 1.5 per litre of petrol and Rs 3 per litre of diesel from the states’ divisible pool of taxes to the cess and surcharge revenue, which is entirely with the centre.  Similarly, over the last four years, the share of tax component in the excise duty has decreased by 40% in petrol and 59% in diesel (table 2).  At present, majority of the excise duty levied on petrol (96%) and diesel (94%) is in the form of cess and surcharge, due to which it is entirely under the centre’s share (Table 2).  

Table 2: Break up of excise duty (Rs per litre)

Excise duty

Petrol

Diesel

Apr-17

% share of total

Feb-21

% share

Apr-17

% share of total

Feb-21

% share

Tax (devolved to states)

9.48

44%

1.4

4%

11.33

65%

1.8

6%

Cess and surcharge (centre)

12

56%

31.5

96%

6

35%

30

94%

Total

21.48

100%

32.9

100%

17.33

100%

31.8

100%

Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS

As a result, the devolution to states out of the excise duty has declined over the last four years.   Even though the excise duty collections have increased sharply between 2019-20 and 2020-21, the devolved component has declined from Rs 26,464 to Rs 19,578 (revised estimate) in the same period.    

Annexure

Table 3: Sales taxes/VAT rates levied on petrol and diesel across states (as on October 1, 2021)

State/UT

Petrol

Diesel

Andaman & Nicobar Islands

6%

6%

Andhra Pradesh

31% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess an

d Vat thereon

22.25% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess and Vat thereon

Arunachal Pradesh

20%

13%

Assam

32.66% or Rs.22.63 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre

23.66% or Rs.17.45 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre

Bihar

26% or Rs 16.65/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax)

19% or Rs 12.33/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax)

Chandigarh

Rs.10/KL cess +22.45% or Rs.12.58/Litre whichever is higher

Rs.10/KL cess + 14.02% or Rs.7.63/Litre whichever is higher

Chhattisgarh

25% VAT + Rs.2/litre VAT

25% VAT + Rs.1/litre VAT

Dadra and Nagar Haveli and Daman and Diu

20% VAT

20% VAT

Delhi

30% VAT

Rs.250/KL air ambience charges + 16.75% VAT

Goa

27% VAT + 0.5% Green cess

23% VAT + 0.5% Green cess

Gujarat

20.1% VAT+ 4% Cess on Town Rate & VAT

20.2% VAT + 4 % Cess on Town Rate & VAT

Haryana

25% or Rs.15.62/litre whichever is higher as VAT+5% additional tax on VAT

16.40% VAT or Rs.10.08/litre whichever is higher as VAT+5% additional tax on VAT

Himachal Pradesh

25% or Rs 15.50/Litre- whichever is higher

14% or Rs 9.00/Litre- whichever is higher

Jammu & Kashmir

24% MST+ Rs.5/Litre employment cess, Reduction of Rs.0.50/Litre

16% MST+ Rs.1.50/Litre employment cess 

Jharkhand

22% on the sale price or Rs. 17.00 per litre , which ever is higher + Cess of Rs 1.00 per Ltr

22% on the sale price or Rs. 12.50 per litre , which ever is higher + Cess of Rs 1.00 per Ltr

Karnataka

35% sales tax

24% sales tax

Kerala

30.08% sales tax+ Rs.1/litre additional sales tax + 1% cess 

22.76% sales tax+ Rs.1/litre additional sales tax + 1% cess 

Ladakh

24% MST+ Rs.5/Litre employment cess, Reduction of Rs.2.5/Litre

16% MST+ Rs.1/Litre employment cess , Reduction of Rs.0.50/Litre

Lakshadweep

Nil

Nil

Madhya Pradesh

33 % VAT + Rs.4.5/litre VAT+1%Cess

23% VAT+ Rs.3/litre VAT+1% Cess

Maharashtra – Mumbai, Thane , Navi Mumbai,  Amravati & Aurangabad

26% VAT+ Rs.10.12/Litre additional tax 

24% VAT+ Rs.3.00/Litre additional tax 

Maharashtra (Rest of State)

25% VAT+ Rs.10.12/Litre additional tax 

21% VAT+ Rs.3.00/Litre additional tax 

Manipur

32% VAT

18% VAT

Meghalaya

20% or Rs15.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge) 

12% or Rs9.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge) 

Mizoram

25% VAT

14.5% VAT

Nagaland

25% VAT or Rs. 16.04/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess 

16.50% VAT or Rs. 10.51/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess 

Odisha

32% VAT

28% VAT

Puducherry

23% VAT

17.75% VAT

Punjab

Rs.2050/KL (cess)+ Rs.0.10 per Litre (Urban Transport Fund) + 0.25 per Litre (Special Infrastructure Development Fee)+24.79% VAT+10% additional tax on VAT

Rs.1050/KL (cess) + Rs.0.10 per Litre (Urban Transport Fund) +0.25 per Litre (Special Infrastructure Development Fee) + 15.94% VAT+10% additional tax on VAT

Rajasthan

36% VAT+Rs 1500/KL road development cess

26% VAT+ Rs.1750/KL road development cess

Sikkim

25.25% VAT+ Rs.3000/KL cess 

14.75% VAT + Rs.2500/KL cess 

Tamil Nadu

13% + Rs.11.52 per litre

11%  + Rs.9.62 per litre

Telangana

35.20% VAT

27% VAT

Tripura

25% VAT+ 3% Tripura Road Development Cess

16.50% VAT+ 3% Tripura Road Development Cess

Uttar Pradesh

26.80% or Rs 18.74/Litre whichever is higher

17.48% or Rs 10.41/Litre whichever is higher

Uttarakhand

25% or Rs 19 Per Ltr whichever is greater

17.48% or Rs Rs 10.41 Per Ltr whichever is greater

West Bengal

25% or Rs.13.12/litre whichever is higher as sales tax+ Rs.1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax)

17% or Rs.7.70/litre whichever is higher as sales tax + Rs 1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax)

Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.