In the run up to the Budget session of Parliament, the Cabinet has decided to accept some of the key recommendations of the Select Committee on the Lokpal and Lokayuktas Bill, 2011. The Bill, passed by the Lok Sabha in December 2011, was referred to a Select Committee by the Rajya Sabha. The Select Committee gave its recommendations on the Bill a year later in November 2012. At the Cabinet meeting held on January 31, 2013, the government has accepted some of these recommendations (see here for PRS comparison of the Bill, Select Committee recommendations and the approved amendments). Key approved amendments Lokayuktas: One of the most contentious issues in the Lokpal debate has been the establishment of Lokayuktas at the state level. The Bill that was passed by the Lok Sabha gave a detailed structure of the Lokayuktas. However, the Committee was of the opinion that while each state has to set up a Lokayukta within a year of the Act coming into force, the nature and type of the Lokayuktas should be decided by the states. The Cabinet has agreed with the suggestion of the Committee. Inclusion of NGOs: Currently, “public servant” is defined in the Indian Penal Code to include government officials, judges, employees of universities, Members of Parliament, Ministers etc. The Bill expanded this definition by bringing societies and trusts which receive donations from the public (over a specified annual income) and, organizations which receive foreign donations (over Rs 10 lakh a year) within the purview of the Lokpal. The Committee had however objected to the inclusion of organisations that receive donations from the public on the ground that bodies such as a rotary club or a resident’s welfare association may also be covered under the Lokpal. Bringing such entities within the Lokpal’s purview would make it unmanageable. The Cabinet decided not to accept this recommendation stating that this view had been accepted by the Standing Committee while examining the version of the Bill introduced in the Lok Sabha. However, the government has exempted trusts or societies for religious or charitable purposes registered under the Societies Registration Act. Procedure of inquiry and investigation: A key recommendation of the Committee was to allow the Lokpal to directly order an investigation if a prima facie case existed (based on the complaint received). The Cabinet has accepted this suggestion but suggested that the Lokpal should, before deciding that a prima facie case exists, call the public servant for a hearing. An investigation should be ordered only after hearing the public servant. Also, the Cabinet has not accepted the recommendation of the Committee that a public servant should be allowed a hearing only at the end of the investigation before filing the charge-sheet and not at any of the previous stages of the inquiry. Power to grant sanction: One of the key reasons cited for delays in prosecuting corrupt public officials is the requirement of a sanction from the government before a public servant can be prosecuted. The Bill shifts the power to grant sanction from the government to the Lokpal. It states that the investigation report shall be considered by a 3-member Lokpal bench before filing a charge-sheet or initiating disciplinary proceedings against the public servant. The Committee recommended that at this point both the competent authority (to whom the public servant is responsible) and the concerned public servant should be given a hearing. This has been accepted by the Cabinet. Reforms of CBI: There are divergent views over the role and independence of the CBI. The Committee made several recommendations for strengthening the CBI. They include: (a) the appointment of the Director of CBI will be through a collegium comprising of the PM, Leader of the Opposition of the Lok Sabha and Chief Justice of India; (b) the power of superintendence over CBI in relation to Lok Pal referred cases shall vest in the Lokpal; (c) CBI officers investigating cases referred by the Lokpal will be transferred with the approval of the Lokpal; and (d) for cases referred by the Lokpal, the CBI may appoint a panel of advocates (other than government advocates) with the consent of the Lok pal. All the recommendations regarding the CBI has been accepted by the Cabinet except one that requires the approval of the Lokpal to transfer officers of CBI investigating cases referred by the Lokpal. Eligibility of Lokpal member: According to the Bill, any person connected with a political party cannot be a member of the Lokpal. The Committee’s recommendation was to change the term connected to affiliated to remove any ambiguity about the meaning. This suggestion was accepted by the government. Now the interesting question is what happens if the Rajya Sabha passes the Bill with these amendments. The Bill will have to go back to the Lok Sabha for its approval since new amendments were added by the Rajya Sabha. If the Lok Sabha passes these amendments, the office of the Lokpal may finally see the light of day. (See here for PRS analysis of the Lokpal and Lokayukta Bill, 2011).
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.
