Each year during the Budget Session, Rajya Sabha examines the working of certain ministries. This year it has identified four ministries for discussion, which includes the Ministry of Home Affairs. In light of this, we analyse some key functions of the Ministry and the challenges in carrying out these functions.
What are the key functions of Ministry of Home Affairs?
The Ministry of Home Affairs (MHA) is primarily responsible for: (i) maintenance of internal security, (ii) governance issues between the centre and states, and (iii) disaster management. It also discharges several other key functions that include: (i) border management, (ii) administration of union territories, (iii) implementation of provisions relating to the official languages, and (iv) conducting the population census every ten years.
Under the Constitution, ‘public order’ and ‘police’ are state list subjects. The MHA assists the state governments by providing them: (i) central armed police forces, and (ii) financial assistance for modernising state police forces, communication equipment, weaponry, mobility, training and other police infrastructure.
What is the role of the central armed police forces?
The MHA manages seven central police forces: (i) Central Reserve Police Force (CRPF) which assists in internal security and law and order, (ii) Central Industrial Security Force (CISF) which protects vital installations (like airports) and public sector undertakings, (iii) National Security Guards which is a special counter-terrorism force, and (iv) four border guarding forces, namely, Border Security Force (BSF), Indo-Tibetan Border Police (ITBP), Sashastra Seema Bal (SSB) and Assam Rifles (AR).
As of January 2017, the total sanctioned strength of the seven CAPFs was 10. 8 lakhs. However, 15% of these posts (i.e., about 1.6 lakhs posts) were lying vacant. The vacancy in the CAPFs has remained above 7% for the last five years (see Table 1). In 2017, the Sashastra Seema Bal had the highest vacancy (57%). The CRPF, which accounts for 30% of the total sanctioned strength of the seven CAPFs, had a vacancy of 8%.
How does MHA assist the police forces?
In Union Budget 2018-19, Rs 1,07,573 crore has been allocated to the Ministry of Home Affairs. The Ministry has estimated to spend 82% of this amount on police. The remaining allocation is towards grants to Union Territories, and other items including disaster management, rehabilitation of refugees and migrants, and the Union Cabinet.
The MHA has been implementing Modernisation of Police Forces (MPF) scheme since 1969 to supplement the resources of states for modernising their police forces. Funds from the MPF scheme are utilised for improving police infrastructure through construction of police stations, and provision of modern weaponry, surveillance, and communication equipment. Some other important objectives under the scheme include upgradation of training infrastructure, police housing, and computerisation.
The scheme has undergone revision over the years. A total allocation of Rs 11,946 crore was approved for the MPF scheme, for a five-year period between 2012-13 to 2016-17. Following the recommendations of the 14th Finance Commission (to increase the share of central taxes to states), it was decided that the MPF scheme would be delinked from central government funding from 2015-16 onwards. However, in September 2017, the Union Cabinet approved an outlay of Rs 25,060 crore under the scheme, for the period 2017-18 to 2019-20. The central government will provide about 75% of this amount, and the states will provide the remaining 25%.
The Comptroller and Auditor General (CAG) has found that weaponry in several state police forces is outdated, and there is a shortage of arms and ammunitions. An audit of Rajasthan police force(2009-14) found that there was a shortage of 75% in the availability of modern weapons against the state’s requirements. In case of West Bengal and Gujarat police forces, CAG found a shortage of 71% and 36% respectively. Further, there has been a persistent problem of underutilisation of modernisation funds by the states. Figure 1 shows the level of utilisation of modernisation funds by states between 2010-11 and 2016-17.
What are the major internal security challenges in India?
Maintaining internal security of the country is one of the key functions of the MHA. The major internal security challenges that India faces are: (i) terrorist activities in the country, (ii) cross-border terrorism in Jammu and Kashmir, (iii) Left Wing Extremism in certain areas, and (iv) insurgency in the North-Eastern states.
Between 2015 and 2016, the number of cross-border infiltrations in Jammu and Kashmir increased by almost three times, from 121 to 364. On the other hand, incidents of insurgency in Left Wing Extremism areas have decreased from 1,048 in 2016 to 908 in 2017.
The Standing Committee on Home Affairs noted in 2017-18 that security forces in Jammu and Kashmir are occupied with law and order incidents, such as stone pelting, which gives militants the time to reorganise and perpetrate terror attacks. The Committee recommended that the MHA should adopt a multi-pronged strategy that prevents youth from joining militancy, curbs their financing, and simultaneously launch counter-insurgency operations.
In relation to Left Wing Extremism, the Standing Committee (2017) observed that police and paramilitary personnel were getting killed because of mine blasts and ambushes. It recommended that the MHA should make efforts to procure mine-resistant vehicles. This could be done through import or domestic manufacturing under the ‘Make in India’ programme.
What is the MHA’s role in border management?
India has a land border of over 15,000 kms, which it shares with seven countries (Pakistan, China, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan). Further, it has a coastline of over 7,500 kms. The MHA is responsible for: (i) management of international lands and coastal borders, (ii) strengthening of border guarding, and (iii) creation of infrastructure such as roads, fencing, and lighting of borders.
Construction of border outposts is one of the components of infrastructure at border areas. The Standing Committee on Home Affairs (2017) noted that the proposal to construct 509 outposts along the India-Bangladesh, and India-Pakistan borders had been reduced to 422 outposts in 2016. It recommended that such a reduction should be reconsidered since 509 outposts would reduce the inter-border outpost distance to 3.5 kms, which is important for the security of the country.
How is coastal security carried out?
Coastal security is jointly carried out by the Indian Navy, Indian Coast Guard, and marine police of coastal states and Union Territories. The MHA is implementing the Coastal Security Scheme to strengthen the marine police of nine coastal states and four Union Territories by enhancing surveillance, and improve patrolling in coastal areas. Under this scheme, the Ministry sought to construct coastal police stations, purchase boats, and acquire vehicles for patrolling on land, among other objectives.
The Standing Committee on Home Affairs (2017) observed that the implementation of Phase-II of this scheme within the set time-frame has not been possible. It also noted that there was lack of coordination between the Indian Navy, the Indian Coast Guard, and the coastal police. In this context, the Committee recommended that the Director General, Indian Coast Guard, should be the nodal authority for coordinating operations related to coastal security.
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 %)
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
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.
