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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.
As the dust settles around the 16th Lok Sabha, attention must now shift to the state assemblies, some of which have been newly constituted like Rajasthan, Chhattisgarh, Madhya Pradesh, Odisha, Andhra Pradesh and the few that will go into elections in the next few months like Maharashtra and Haryana. There are 30 state legislative assemblies not including the newly formed state of Seemandhara. In our federal structure, laws framed by the state assemblies are no less important and deserve the same diligence and debate as laws made by Parliament. A brief look in to the performance of some of our state assemblies reveals that these institutions which form the cornerstones of our democracy need some serious attention. State Assemblies: business hours The current Haryana Legislative Assembly that comes to the end of its five year term in October this year has held 10 sessions since 2009 till March 2014, meeting for a total of 54 days – an average of 11 days per year. In comparison, the Lok Sabha sat for an average of 69 days each year from 2009 to 2014. Among state assemblies, only Nagaland and Arunachal Pradesh sat for fewer days than Haryana. In the same period the Kerala Assembly sat for an average of 50 days per year, while Tamil Nadu Assembly sat for 44 days. In its previous term, the Gujarat Legislative Assembly sat for a total of 157 days – an average of 31 days each year. Similarly, the current Goa Legislative Assembly sat for 24 days in 2012 and for 39 days in 2013. Over the last 10 years, the Assembly sat for an average of 26 days a year. It recorded the highest number of sitting days in the last 10 years, at 39 days. Law making in the states In most states, Bills are passed with little or no discussion. Most Bills are introduced and passed on the last day of each session, which gives Members hardly any opportunity to examine or discuss legislation in detail. Unlike Parliament, where most Bills are referred to a department related standing committee which studies the Bill in greater detail, in most states such committees are non-existent. The exceptions are Kerala which has constituted subject committees for this purpose and states like Goa and Himachal Pradesh where Select Committees are constituted for important Bills. The current Haryana Assembly has passed 129 Bills, all of which were passed on the same day as they were introduced. Upto 23 Bills were passed on a single day, which left hardly any time for substantial discussion. In the twelfth Gujarat Assembly, over 90% of all Bills were passed on the same day as they were introduced. In the Budget Session of 2011, 31 Bills were passed of which 21 were introduced and passed within three sitting days. Of the 40 Bills passed by the Goa Assembly till May 2013, three Bills were referred to Select Committees. Excluding Appropriation Bills, the Assembly passed 32 Bills, which were taken up together for discussion and passing in five days. Almost all Bills were passed within three days of introduction. On average, each Bill was discussed for four minutes. In 2012, the West Bengal Legislative Assembly passed a total of 39 Bills, including Appropriation Bills. Most Bills were passed on the same day they were introduced in the Assembly. In 2011, a total of 23 Bills were passed. On average, five Members participated in the discussions on each Bill. In 2012, the Delhi Legislative Assembly passed 11 Bills. Only one of the 11 Bills was discussed for more than 10 minutes. The performance of the Chhattisgarh and Bihar Vidhan Sabhas follow the same pattern. Over the last few years, some assemblies such as Andhra Pradesh, Rajasthan and Haryana have taken some positive steps which include setting up subject committees and permitting live telecast of Assembly proceedings. Every legislator- in Parliament and the states - is accountable to his voter. Weak democratic institutions deprive legislators of their right to oversee the government as enshrined in the Constitution. Inadequate number of sitting days, lack of discussion on Bills, and passing of the Budget and demands for grants without discussion are symptoms of institutional ennui and do not do justice to the enormous import of these legislative bodies. Serious thought and public debate is needed to reinvigorate these ‘temples of democracy’ and provide elected representatives with the opportunity to exercise their right to legislative scrutiny, hold government to account, and represent their constituents.
