On March 10, Lok Sabha passed a Bill to amend the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The Bill is now pending in Rajya Sabha. This blog briefly outlines the context and the major legislative changes to the land acquisition law. I. Context Land acquisition, unlike the purchase of land, is the forcible take-over of privately owned land by the government. Land is acquired for projects which serve a ‘public purpose’. These include government projects, public-private partnership projects, and private projects. Currently, what qualifies as ‘public purpose’ has been defined to include defence projects, infrastructure projects, and projects related to housing for the poor, among others. Till 2014, the Land Acquisition Act, 1894 regulated the process of land acquisition. While the 1894 Act provided compensation to land owners, it did not provide for rehabilitation and resettlement (R&R) to displaced families. These were some of the reasons provided by the government to justify the need for a new legislation to regulate the process of land acquisition. Additionally, the Supreme Court had also pointed out issues with determination of fair compensation, and what constitutes public purpose, etc., in the 1894 Act. To this end, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 was passed by Parliament, in 2013. II. Current legislative framework for land acquisition The 2013 Act brought in several changes to the process of land acquisition in the country. Firstly, it increased the compensation provided to land owners, from 1.3 times the price of land to 2 times the price of land in urban areas, and 2-4 times the price of land in rural areas. Secondly, unlike the earlier Act which did not provide rehabilitation and resettlement, the 2013 Act provided R&R to land owners as well as those families which did not own land, but were dependent on the land for their livelihood. The Act permits states to provide higher compensation and R&R. Thirdly, unlike the previous Act, it mandated that a Social Impact Assessment be conducted for all projects, except those for which land was required urgently. An SIA assesses certain aspects of the acquisition such as whether the project serves a public purpose, whether the minimum area that is required is being acquired, and the social impact of the acquisition. Fourthly, it also mandated that the consent of 80% of land owners be obtained for private projects, and the consent of 70% of land owners be obtained for public-private partnership projects. However, consent of land owners is not required for government projects. The 2013 Act also made certain other changes to the process of land acquisition, including prohibiting the acquisition of irrigated multi-cropped land, except in certain cases where the limit may be specified by the government. III. Promulgation of an Ordinance to amend the 2013 Act In addition to the 2013 Act, there are certain other laws which govern land acquisition in particular sectors, such as the National Highways Act, 1956 and the Railways Act, 1989. The 2013 Act required that the compensation and R&R provisions of 13 such laws be brought in consonance with it, within a year of its enactment, (that is, by January 1, 2015) through a notification. Since this was not done by the required date, the government issued an Ordinance (as Parliament was not in session) to extend the compensation and R&R provisions of the 2013 Act to these 13 laws. However, the Ordinance also made other changes to the 2013 Act. The Ordinance was promulgated on December 31, 2014 and will lapse on April 5, 2015 if not passed as a law by Parliament. Thus, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015 has been introduced in Parliament to replace the Ordinance. The Bill has been passed by Lok Sabha, with certain changes, and is pending in Rajya Sabha. The next section outlines the major changes the Bill (as passed by Lok Sabha) proposes to make to 2013 Act. IV. Changes proposed by the 2015 Bill to the 2013 Act Some of the major changes proposed by the 2015 Bill (as passed by Lok Sabha) relate to provisions such as obtaining the consent of land owners; conducting an SIA; return of unutilised land; inclusion of private entities; and commission of offences by the government. Certain exemptions for five categories of projects: As mentioned above, the 2013 Act requires that the consent of 80% of land owners is obtained when land is acquired for private projects, and the consent of 70% of land owners is obtained when land is acquired for public-private partnership projects. The Bill exempts five categories of projects from this provision of the 2013 Act. These five categories are: (i) defence, (ii) rural infrastructure, (iii) affordable housing, (iv) industrial corridors (set up by the government/government undertakings, up to 1 km on either side of the road/railway), and (v) infrastructure projects. The Bill also allows the government to exempt these five categories of projects from: (i) the requirement of a Social Impact Assessment, and (ii) the limits that apply for acquisition of irrigated multi-cropped land, through issuing a notification. Before issuing this notification, the government must ensure that the extent of land being acquired is in keeping with the minimum land required for such a project. The government has stated that these exemptions are being made in order to expedite the process of land acquisition in these specific areas. However, the opponents of the Bill have pointed out that these five exempted categories could cover a majority of projects for which land can be acquired, and consent and SIA will not apply for these projects. Return of unutilised land: Secondly, the Bill changes the time period after which unutilised, acquired land must be returned. The 2013 Act states that if land acquired under it remains unutilised for five years, it must be returned to the original owners or the land bank. The Bill changes this to state that the period after which unutilised land will need to be returned will be the later of: (i) five years, or (ii) any period specified at the time of setting up the project. Acquisition of land for private entities: Under the 2013 Act, as mentioned above, land can be acquired for the government, a public-private partnership, or a private company, if the acquisition serves a public purpose. The third major change the Bill seeks to make is that it changes the term ‘private company’ to ‘private entity’. This implies that land may now be acquired for a proprietorship, partnership, corporation, non-profit organisation, or other entity, in addition to a private company, if the project serves a public purpose. Offences by the government: Fourthly, under the 2013 Act, if an offence is committed by a government department, the head of the department will be held guilty unless he can show that he had exercised due diligence to prevent the commission of the offence. The Bill removes this section. It adds a provision to state that if an offence is committed by a government employee, he can be prosecuted only with the prior sanction of the government. Acquisition of land for private hospitals and educational institutions: While the 2013 Act excluded acquisition of land for private hospitals and private educational institutions, the Bill sought to include these two within its scope. However, the Lok Sabha removed this provision of the Bill. Thus, in its present form, the Bill does not include the acquisition of land for private hospitals and private educational institutions. Other changes proposed in Lok Sabha: In addition to removing social infrastructure from one of the five exempted categories of projects, clarifying the definition of industrial corridors, and removing the provision related to acquisition for private hospitals and private educational institutions, the Lok Sabha made a few other changes to the Bill, prior to passing it. These include: (i) employment must be provided to ‘one member of an affected family of farm labour’ as a part of the R&R award, in addition to the current provision which specifies that one member of an affected family must be provided employment as a part of R&R; (ii) hearings of the Land Acquisition, Rehabilitation and Resettlement Authority to address grievances related to compensation be held in the district where land is being acquired; and (iii) a survey of wasteland must be conducted and records of these land must be maintained. For more details on the 2015 Bill, see the PRS Bill page, here. A version of this blog appeared on rediff.com on February 27, 2015.
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.
