Parliament passes an average of 60 Bills a year. Each state legislature also passes a similar volume of legislation addressing an array of complex issues. Bills cover subjects ranging from microfinance, land acquisition, and honour killings to the impact of pesticides on health. Legislative matters have become increasingly more technical and require specialist inputs to be framed as effective public policy. Unlike other large democracies, legislators in India do not have access to institutional research support. Access to formal information channels is normally available only to the Minister drafting the bill or to the select committee if the bill is referred to it. This deprives MLAs from participating in a more informed debate. Towards this end, PRS and the Indian School of Business (ISB) have initiated the first policy workshop of its kind for MLAs in India. There is an emerging breed of proactive MLAs who are willing to seek out information to help them perform their role better. There are over 4000 MLAs in India, and a small group of MLAs in many states are showing this initiative. They use the internet, consult specialists, and use resources like PRS to get updated or further information on issues affecting their state. About the Workshop The India Leadership workshop is for MLAs who want to be more effective legislators and assume positions of greater influence in state and national policymaking. This unique workshop is for rising stars who want to imbibe new approaches to policymaking and build professional networks with MLAs from different states. The programme is led by distinguished faculty from internally reputed institutions including Harvard, IITs and IIMs. The three day workshop for progressive MLAs will be held at the campus of ISB in Hyderabad. Four such sessions will be held during the year, with the maiden edition being launched in January 2011. Over the last five years, PRS has worked with MPs across all political parties to brief them on relevant issues for their work in Parliament. MPs have recommended that MLAs also would benefit from similar research services. Ajit Rangnekar, Dean, Indian School of Business (ISB) says, “The ISB is committed to working with the Industry and the Government to help achieve national goals. We already have had a long track of engaging with public sector enterprises, and more recently with various government departments, in both executive education and research. We are now delighted to partner with the PRS Legislative Research to develop this programme targeted at capacity building among Indian Legislators. We believe that this ongoing interaction between the government and academia will strengthen our collective understanding of national priorities and spur collaboration for greater impact.”
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’.
