On merger of railway budget and union budget – The Indian Railways’ revenue problem

Source: The post on Indian Railways is based on the article “The Indian Railways’ revenue problem” published in “The Hindu” on 30th October 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Infrastructure (Railway)

News: The article discusses the issue of the declining revenues of Indian Railways and the various reasons which have led to this situation.

Why was Indian railway budget merged with Union budget?  

In 2017, the two budgets were merged, simplifying financial processes and increasing efficiency.  The reasons behind this decision were:

Historical Context: The separate Railway Budget started in 1924 under British rule.

Global Uniqueness: India was the only country with a separate Railway Budget.

Size Reduction: Over the years, the Railway Budget has shrunk.

NITI Aayog’s Recommendation: NITI Aayog suggested that a separate budget wasn’t needed anymore.

Clear Financial Picture: A combined budget offers a complete overview of the government’s finances.

Integrated Planning: The merger promotes joint planning across railways, highways, and waterways.

Financial Flexibility: It allows the Ministry of Finance to better allocate resources mid-year.

Why is Indian Railways spending more? 

1) Budget Merger: Indian Railways combined its rail budget with the main budget. This merger allows for greater Gross Budgetary Support (GBS) from the central government, leading to increased spending without much oversight.

2) Lack of Surplus: Indian Railways doesn’t have enough surplus from its earnings. To fund projects, they’ve had to seek additional funds from both GBS and Extra Budgetary Resources (EBS).

3) Debt Accumulation: Repayment costs for principal and interest have risen, accounting for 17% of their revenues.

4) Possible Economic Boost: The increased capital expenditure is based on the belief that investing in railways will stimulate the country’s economy. Which can lead to gains in manufacturing, services, tax revenues, and job opportunities.

What are the issues with the business performance of Indian Railways? 

Freight Growth Lag: Between April-July 2023, freight volume grew by only 1%, and revenue by 3%. This is low considering the economy grew by 7%.

Decreasing Market Share: Once handling over 80% of India’s freight business at the time of independence, it’s now down to just 27%.

Declining share in Coal Transport: The share of coal transported by railways remains below past levels.

Lack of share in Container Transport: Only 13% of containers moving in and out of ports use the railways.

Terminology used:

Gross Budgetary Support (GBS): This is the money the government sets aside to support its annual spending plan, which aligns with its long-term (5-year) development goals. The spending goes towards a variety of sectors, from agriculture to education to justice administration.

Extra Budgetary Borrowings (EBRs): These are essentially loans taken out by government-owned companies to fund various schemes initiated by the government. Even though these loans are used for government projects, they aren’t directly included in the official budget numbers. So, while these borrowings don’t impact the fiscal deficit directly, they do increase the overall debt of the government.

Question for practice:

How can Indian Railways enhance freight market share and offset passenger losses while managing its rising debt and capital expenditures?