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Authored by Vishnu Padmanabhan and Priya Soman The Budget speech may have already been scrutinised and the numbers analysed but the Budget process is far from complete.  The Constitution requires expenditure from the government’s Consolidated Fund of India to be approved by the Lok Sabha (the Rajya Sabha does not vote, but can suggest changes). After the Finance Minister presents the Union Budget, Parliament holds a general discussion followed by a detailed discussion and vote on Demands for Grants. In the general discussion, the House discusses the Budget as a whole but no motions can be moved and no voting takes place.  In the 15th Lok Sabha, the average time spent during the Budget Session on general discussion has been 13 hours 20 minutes so far. Following the general discussion, Parliament breaks for recess while Demands for Grants – the projected expenditure by different ministries - are examined by the relevant Standing Committees of Parliament. This year Parliament is scheduled to break for a month from March 22nd to April 22nd. After the break, the Standing Committees table their reports; the grants are discussed in detail and voted on.  Last year, the total time spent on the Union Budget, on both general and detailed discussion was around 32 hours (or 18% of total time in the session), largely in line with the average time spent over the last 10 years (33 hours, 20% of total time). A unique feature of Indian democracy is the separate presentation and discussion for the Railway Budget.  Including the Railway Budget the overall time spent on budget discussion last year was around 55 hours (30% of total time in the session).

Note: All data from Budget sessions; data from 2004 and 2009 include interim budget sessions. Source: Lok Sabha Resume of Work, PRS

 

During the detailed discussion, MPs can call for ‘cut motions’ to reduce the amounts of demands for grants made by a Ministry. This motion can be tabled in three ways: (i) ‘the amount of the demand be reduced to Re.1/’ signifying disapproval of the policies of that ministry; (ii)  ‘the amount of the demand be reduced by a specified amount’, an economy cut signifying a disapproval of the amount spent by the ministry  and (iii) ‘the amount of the demand be reduced by Rs.100/-', a token cut airing a specific grievance within the policy of the government. However in practice almost all demands for grants are clubbed and voted together (a process called guillotining). In 2012, 92% of demands for grants were guillotined. The grants for Ministries of Commerce and Industry, Health and Family Welfare, Home Affairs and Urban Development were the only grants taken up for discussion. Over the last 10 years, 85% of demands for grants have been voted for without discussion. The most frequently discussed demand for grants come from the Ministry of Home Affairs (discussed in 6 of the last 10 sessions) and the Ministry of Rural Development (5 times).  Demand for grants for Defence, the largest spending Ministry, has only been voted after discussion once in the last 10 years.

Source: Lok Sabha Resume of Work, Union Budget documents, PRS

 

If the government needs to spend any additional money, it can introduce Supplementary Demands for Grants during the year.  However if after the financial year government spending on a service exceeds the amount granted, then an Excess Demand for Grant has to be introduced and passed in the following year.  The Budget process concludes with the introduction and passage of the Appropriation Bill authorising the government to spend money from the Consolidated Fund of India. In addition, a Finance Bill, containing the taxation proposals of the government is considered and passed by the Lok Sabha after the Demands for Grants have been voted upon.

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.