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As per news reports, the union government has filed a Presidential Reference in relation to the 2G judgment. In this judgment the Supreme Court had cancelled 122 2G licences granting access to spectrum and had ordered their re-allocation by means of an auction. It also held that use of first cum first serve policy (FCFS) to allocate natural resources was unconstitutional. It had held that natural resources should be allocated through auctions. As per the news report, the Presidential Reference seeks clarity on whether the Supreme Court could interfere with policy decisions. This issue has been discussed in a number of cases. For instance, the Supreme Court in Directorate of Film Festivals v. Gaurav Ashwin Jain[1] held that Courts cannot act as an appellate authority to examine the correctness, suitability and appropriateness of a policy. It further held that Courts cannot act as advisors to the executive on policy matters which the executive is entitled to formulate. It stated that the Court could review whether the policy violates fundamental rights, or is opposed to a Constitutional or any statutory provision, or is manifestly arbitrary. It further stated that legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review. In Suresh Seth vs. Commissioner, Indore Municipal Corporation[2] a three judge bench of the Court observed that, “this Court cannot issue any direction to the Legislature to make any particular kind of enactment. Under our constitutional scheme Parliament and Legislative Assemblies exercise sovereign power or authority to enact laws and no outside power or authority can issue a direction to enact a particular piece of legislation.” In the present case it may be argued that whereas the Court was empowered to declare a policy such as FCFS as unconstitutional, it did not have the jurisdiction to direct auctioning of spectrum and other natural resources. The Presidential Reference may conclusively determine the Court’s jurisdiction in this regard. However, it has been urged by a few experts that this Presidential Reference amounts to an appeal against the decision of the Court. They have argued that this could be done only through a Review Petition (which has already been admitted by the Court). The advisory jurisdiction of the Court invoked through Presidential References, is governed by Article 143 of the Constitution. Under Article 143 of the Constitution of India, the President is empowered to refer to the Supreme Court any matter of law or fact. The opinion of the Court may be sought in relation to issues that have arisen or are likely to arise. A Presidential Reference may be made in matters that are of public importance and where it is expedient to obtain the opinion of the Supreme Court. The Court may refuse to answer all or any of the queries raised in the Reference. A Presidential Reference thus requires that the opinion of the Court on the issue should not have been already obtained or decided by the Court. In the Gujarat Election Case[3] the Supreme Court took note of Presidential References that were appellate in nature. Thus, a Presidential Reference cannot be adopted as a means to review or appeal the judgment of the Supreme Court. Against judgments of the Court the mechanisms of review is the only option. This position was also argued by Senior Advocate Fali S. Nariman in the Cauvery Water Case[4], where the Court refused to give an opinion. Whether the Court had the authority to determine a policy, such as FCFS, as unconstitutional is not disputed. However, there are conflicting judgments on the extent to which a Court can interfere with the executive domain. It would be interesting to see whether the Court would give its opinion on this issue. In the event it does, it may bring higher level of clarity to the relationship between the executive and the judiciary.
[1] AIR 2007 SC 1640
[2] AIR2006SC767
[3] (2002) 8 SCC 237
[4] (1993) Supp 1 SCC 96(II)
Recently, the Indian Railways announced rationalisation of freight fares. This rationalisation will result in an 8.75% increase in freight rates for major commodities such as coal, iron and steel, iron ore, and raw materials for steel plants. The freight rates were rationalised to ensure additional revenue generation across the network. An additional revenue of Rs 3,344 crore is expected from such rationalisation, which will be utilised to improve passenger amenities. In addition, the haulage charge of containers has been increased by 5% and the freight rates of other small goods have been increased by 8.75%. Freight rates have not been increased for goods such as food grains, flours, pulses, fertilisers, salt, and sugar, cement, petroleum, and diesel. In light of this, we discuss some issues around Railways’ freight pricing.
Railways’ sources of internal revenue
Railways earns its internal revenue primarily from passenger and freight traffic. In 2016-17 (latest actual figures available), freight and passenger traffic contributed to about 63% and 28% of the internal revenue, respectively. The remaining is earned from miscellaneous sources such as parcel service, coaching receipts, and platform tickets.
Freight traffic: Railways majorly transports bulk freight, and the freight basket has mostly been limited to include raw materials for certain industries such as power plants, and iron and steel plants. It generates most of its freight revenue from the transportation of coal (43%), followed by cement (8%), food-grains (7%), and iron and steel (7%). In 2018-19, Railways expects to earn Rs 1,21,950 crore from its freight traffic.
Passenger traffic: Passenger traffic is broadly divided into two categories: suburban and non-suburban traffic. Suburban trains are passenger trains that cover short distances of up to 150 km, and help move passengers within cities and suburbs. Majority of the passenger revenue (94% in 2017-18) comes from the non-suburban traffic (or the long-distance trains).
Within non-suburban traffic, second class (includes sleeper class) contributes to 67% of the non-suburban revenue. AC class (includes AC 3-tier, AC Chair Car and AC sleeper) contributes to 32% of the non-suburban revenue. The remaining 1% comes from AC First Class (includes Executive class and First Class).
Railways’ ability to generate its own revenue has been slowing
The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining. This is due to a decline in the growth of both freight and passenger traffic. Some of the reasons for such decline include:
Freight traffic growth has been declining, and is limited to a few items
Growth of freight traffic has been declining over the last few years. It has declined from around 8% in the mid-2000s to a 4% negative growth in mid-2010s, before an estimated recovery to about 5% now.
The National Transport Development Policy Committee (2014) had noted various issues with freight transportation on railways. For example, Indian Railways does not have an institutional arrangement to attract and aggregate traffic of smaller parcel size. Further, freight services are run with a focus on efficiency instead of customer satisfaction. Consequently, it has not been able to capture high potential markets such as FMCGs, hazardous materials, or automobiles and containerised cargo. Most of such freight is transported by roads.
The freight basket is also limited to a few commodities, most of which are bulk in nature. For example, coal contributes to about 43% of freight revenue and 25% of the total internal revenue. Therefore, any shift in transport patterns of any of these bulk commodities could affect Railways’ finances significantly.
For example, if new coal based power plants are set up at pit heads (source of coal), then the need for transporting coal through Railways would decrease. If India’s coal usage decreases due to a shift to more non-renewable sources of energy, it will reduce the amount of coal being transported. Such situations could have a significant adverse impact on Railways’ revenue.
Freight traffic cross-subsidises passenger traffic
In 2014-15, while Railways’ freight business made a profit of about Rs 44,500 crore, its passenger business incurred a net loss of about Rs 33,000 crore.17 The total passenger revenue during this period was Rs 49,000 crore. This implies that losses in the passenger business are about 67% of its revenue. Therefore, in 2014-15, for every one rupee earned in its passenger business, Indian Railways ended up spending Rs 1.67.
These losses occur across both suburban and non-suburban operations, and are primarily caused due to: (i) passenger fares being lower than the costs, and (ii) concessions to various categories of passengers. According to the NITI Aayog (2016), about 77% to 80% of these losses are contributed by non-suburban operations (long-distance trains). Concessions to various categories of passengers contribute to about 4% of these losses, and the remaining (73-76%) is due to fares being lower than the system costs.
The NITI Aayog (2016) had noted that 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. The NTDPC (2014) had noted that, in several countries, passenger fares are either higher or almost equal as freight rates. However, in India, the ratio of passenger fare to freight rate is about 0.3.
Impact of increasing freight rates
The recent freight rationalisation further increases the freight rates for certain key commodities by 8.75%, with an intention to improve passenger amenities. Higher freight tariffs could be counter-productive towards growth of traffic in the segment. The NTDPC report had noted that due to such high tariffs, freight traffic has been moving to other modes of transport. Further, the higher cost of freight segment is eventually passed on to the common public in the form of increased costs of electricity, steel, etc. Various experts have recommended that Railways should consider ways to rationalise freight and passenger tariff distortions in a way to reduce such cross-subsidisation.
For a detailed analysis of Railways revenue and infrastructure, refer to our report on ‘State of Indian Railways’.
