Saturday, June 21, 2014

A finance teacher's view on rail price hike

" The railways can survive only if users pay for availing of facilities." - Arun Jaitley, the finance minister

When the finance minister makes this statement it reminded me of a post from one of my friends from school days who has returned to India after quite some time:
"Having jaw dropping experiences in India every time I go out shopping. Prices of everything have tripled or may be even quadrupled than what it was four years ago. The only solace I have is to convert the prices to USD as opposed to my first trip outside India when I used to convert prices to INR and panic." 
source: Facebook. 

Mortals like me who chose to stay in India do not have the "solace" of converting prices to dollar also. So increase in fares cannot be seen in isolation, we need to look at existing inflation levels and impact of increased rail freight on inflation and growth.
Now being a student and teacher of business models,I know one thing for sure people like to pay a premium only when they are satisfied with the existing services. No one pays premium to support  future infrastructure growth. I have been travelling the length and breadth of the country using railway as a medium of transport extensively for the last two years and these are my observations:
  1. Every second person travelling in Ac 2 tier and every person travelling in AC 1 tier does not pay for the service because either he is a railway employee or he is a politician. These are the compartments where the margins are high and elasticity of demand is also high. Imagine if banks starts giving money to employees without claiming it back and only person taking loans meant to be at higher interest rates are bankers who will never return it.
  2. The quality of service in trains are pathetic. Toilets are never clean. The staff on the train who is supposed to clean the toilets is only seen at the time of collecting tips. The attendants never give towels unless asked by the passenger because if the towels are lost he needs to pay from his pockets.
  3. There are very few trains which run on time especially long distance trains. There is no value for money.
  4. Streamlining of operations with a view to reduce cot is more important than increasing prices.
Here is a suggestion I have for the government:
Please understand that if you want to operate as a company you need to appreciate the fact that government is a conglomerate with a number of Strategic business units.In your case, it is not possible to run all the SBU's profitably

The system needs to be streamlined so that corruption is minimized, if not removed. Inflation stems from inability to develop a proper warehousing facility and  from wasteful government expenditure. I am yet to hear of any concrete steps taken by the government in these two areas. I would also like to know if there is any tax payer whose son goes to a state government school 
(I know centre government cannot do much, but then something needs to be done) or he can even imagine being admitted in most of the government hospitals. Please concentrate on these areas it would help improve the standard of living of the country rather than looking at simplistic measures of revenue generation and then using rhetoric to justify a move that does not make sense.

Disclaimer: This is my personal view 


  1. I see it as a struggle between Inclusion and Profitability- How to remain profitable while making sure that the price of a train ticket is within reach of the average Indian. // The HUGE imbalance in wealth distribution in our country and the varied spectrum of income/education/lifestyles makes it impractical for the govt to take broad and bold reformative steps- some or other portion of the population is left out.

  2. A good point put forward by you- make the High End customer pay up- since that is where the margin lies. Totally agree. On another put forward by you, I do not think the Govt can have the luxury of operating as a company- atleast not in case of critical SBUs like transportation - since a majority of India is still poor and are dependent on Govt. Any govt can act as a company only when its entire population can afford to be their customers. India has a lot to cover to reach that stage yet i guess.

  3. Indian Railways operate with an annual loss of around Rs. 25000 crores in the passenger segment. The decision to hike railway price as been reported in all media channels &newspapers was actually taken by the prev govt. but didn't implement the decision as it was running on 'Sonianomics' of populism rather than good 'Economics'. On the point of govt. running a conglomerate I agree that some areas have to be given subsidy. But for a govt. burdened with subsidy in all sectors like LPG, Rlwys, Deisel, Fertilizers, etc., govt. will finally have to take some tough decisions to improve the messin the economy.

    1. The important factor here is the nature of the industry. Any business where the operating leverage is high and fixed cost is high because of the salaries which keeps increasing without increase in efficiency cannot expect to earn profits. Efficiency does not increase because of trade unionism. hence privatisation would have been a better solution.

  4. We all want High speed trains, good facilities, cleanliness, safety etc., and the implementation of all these facilities wil take some time. Govt. is also considering FDI in key areas in Rlwys. Ultimately if the economy is strengthened, by creating real jobs through creation of real employment opportunities, and improving the income levels of ppl, I don't think, people will have problem in paying little extra.

    1. All the examples cited here are that of capital expenditure. Again capital expenditure cannot be always financed through internal accruals.

  5. Could not figure out whether you are for or against the price hike. Anyway here's my take.

    IR carries approx 1.2 to 1.5 cr suburban traffic daily. Lets assume all of them are travelling for work, even then it accounts for less than 5% of Inida's working population. The other 95% do not get any subsidy for travelling to work, so why subsidize only 5%.

    14% hike is not for future expansion, but to cover costs. IR has accumulated losses of 26,000 cr. With this 14% increase it would take 3-4 years to absorb these losses.

    IR can sure become more efficient and cut down corruption, which would solve most of its problems. But increasing efficiency can not be done by clicking on a button.

    A company with revenues of $ 2 million had to spend about half a million over a period of 6 months to improve its efficiency by 2-5% (Based on experience). Now extrapolate that to IR which has revenues of $19 billion.

    As regards corruption your guess is as good as mine.

    A country which has a minimum budget deficit of 4% (more like 4.6 or 4.7) every year can not afford to subsidize travel, whether for work or for pleasure. If Govt tries to cut down spending in sectors like Health, Education, Food we have every reason to make noise; but I don't see a point why we should be subsidizing travel for people who already have a job.

    So in a nutshell all those who are crying foul at this 14%hike, should get their priorities right.

    1. Costs can easily be covered if you streamline your operations:
      1. Reduce manpower
      2. Start charging railway employees not travelling for work related purpose

      If I am travelling inter city for pleasure purpose does not mean I will be charged extrobitantly.
      You forget there are lot of people in India who do not live in native town and have families living in different city. This is known as "mobility" and it is required for India's development.
      No one expects clicking of button is the solution but there has to be efforts in the direction and results would be there for all to see.
      Case in the point T. N. Seshan and impact on elections, Nitish Kumar and Bihar crime, there were intentions and steps taken .
      All efficiency increase does not require investment, if you get honest and dedicated people at right places things might just work when lack of efficiency is because your organsation has become an elephant that does not dance. Increase in inflation at given rate is simply not acceptable. There are a lot of turn around cases which did not involve too much of investment. Example of Tata Steel turnaround in the 1990's and failure of Tata Corus turn around is an example of how environment can make a difference in turn arounds. At present there is where the focus should be.
      4.5% deficit is because of slippages first work on slippages then see the difference. By changing policies systems dont work. Whatever system you have you get it to work.
      Railways cannot run profitably and should not run profitably. If it has to run profitably stop satisfying junta by employing 10 people where only one is needed.On one hand you wear the garb of a socialist and keep hiring people to create job and on the other hand you want to be profitable. I dont know if you are guessing but I am not when it comes to corruption because I travel at least once a month for admission purpose and corruption is there for everyone to see.
      The government says they need money for modernization is that not capital expenditure sir jee

      I just have one point to make I do not have problems with increase in passengers price if is followed by better service. Increase in price because of the cost structure does not work. The finance minister says a loss making company will provide below quality services. I would like to know if any of the services being provided is cost sensitive. The quality of service will remain the same as it cannot be improved by the push of a button because of trade unionism you cannot get these people to work.
      First address the pain points then increase prices less people will complaint. I would rather have a privatized railways than a public sector railway trying to make profit.

    2. Both options given at the top are long term solutions. Reason being the control that labour unions have within our system, can not be negated so easily.
      Secondly, IR does not charge exorbitantly. In fact its one of the cheapest providers of public transport, globally.
      Honest and Dedicated people?? I am yet to come across a person (in a position of power/authority) who can be classified as 100% Honest.
      Majority of problems that ails IR and every other Govt Organisation have their foundations during the socialist era of India (pre 1991); be it excessive manpower or inefficiency.
      Agreed that profitability should not be the core objective of IR; but then it shouldn't be offering subsidized travel. I would rather have the Govt subsidize Health, Food & Education.

      Its too early to start expecting anything substantial, in my opinion, as far as IR is concerned. But rationalization of fares seems to be first step in the right direction.

      We will continue to disagree on whether improvement in service should precede the price increase or succeed it.

      But since the prices have already been increased, lets see if 6-12 months down the line the level of service improves or not. :-)

  6. True. Many of us forget that when an organization the size of Indian railways runs losses, more often than not, it is due to inefficiencies and mismanagement. Simply hiking the fares will not help. Someone has to come forward and clean the rut.

  7. Once Modi gave his idea of privatizing Railway Trains keeping the lines and overhead lines under Government's jurisdiction!.......Is this not the right time to do such things for BJP?

  8. Sir I would like to add some more point . According to me Either Indian Government is confused or donot know what to do with Railways. Either they should announce Indian Railway as a "Free Seva Services " Because our railways minister doesnot know any thing and they are forcefully imposing the decision that cause 30000 crore every year .Also Our Most of the railways Coach is 30 year old & there is no change for improvement because of lack of fund .We can see lots of accident in recent year because of no proper advancement or training .If we want a good and international Railway then we should ready to pay the amount . We can see in metro they are charging money and giving good services .