Rail fare hikes stand justified

I liked the rail budget. There were a lot of expectations around the maiden Rail budget of Modi Sarkar. I liked the candid talk, the way the constraints were presented, the constant mention about making the Railways gen-next friendly, the simple representations of the financials. The Rail Budget spoke about the operations, the aesthetics and the financials in a very candid fashion, which is more than what one can say about the laa-di-laah Laaloo budgets or the moody Mamata ones.

The fact that one would have to do an ABC analysis and prioritize a few projects rather than create more projects that take you nowhere makes sense. This prioritization makes even more sense when you consider the operating ratio of the Railways i.e. the ratio of expenses to earnings. The operating ratio of the Railways stood at a healthy 75% in FY 64 and has deteriorated to 93.5% in 50 years. The writing is clear- our revenues have not kept pace with the increment in costs. This means that we will have to look aggressively at increasing our revenues, despite the Railways having a social, inclusive theme to it.

Where do the revenues come from? 70% of the rail revenues come from the freight traffic. Freight traffic on rails has been facing serious competition from the road carriers in the past 5 years, Its not that rail transport per kilometre is more expensive; however, when one adds logistics delays, booking issues, lack of point to point services, one can see why road transport becomes favoured by the industry. India also has some of the highest average freight revenue per tonne kilometre globally indicating that further increments in freight rates may be detrimental for revenue growth, especially in the current fiscal wherein a good growth momentum is yet to set in.

Passenger traffic contributes only 30% to rail revenues, not because the Railways don’t ferry enough passengers, but because the latter underpay since they stand cross-subsidized by the freight traffic. A look at the figures is telling. The average passenger fare to freight rate ratio for China stands at 1.2, for Malaysia at 0.8 and for India at a meagre 0.3. The Rail Minister underscored that the increment in rail fares was a compulsion and a correction that the Government had to undertake. If one looks at the increments in fares that have happened since FY07 till FY13, its astonishing to note that the average rate per passenger kilometre changed by only 1.3% in 6 years whereas the average rate per tonne kilometre changed by 3%. In FY14, there were some increments that the UPA Government enacted out of necessity that a 9.5% inflation rate created. The correction of 14% in passenger fares will have to be seen as a cumulative effect of the corrections not done by the UPA Government, even when the inflation levels were soaring from 2009 onwards.

The 14% hike hits the common man directly. It contributes directly to increased cost of living and increased inflation, for those people who use these services. So, what in the world happened to the “Ab acche din aayenge” model? It is important for us to realize that the pay-if-you-use model has a lot of advantages to it. Were this fare hike not implemented, it would have shown up as a loss, eventually adding to the fiscal burden, further leading to money creation and hence to inflation, for everybody across the board, for users and non-users alike. Its just not a great idea to ask the non-users of railways to pay an inflation tax to subsidize the users for their travel. An across-the board inflation hurts the public more since it feeds into the dearness allowances, setting off the wage price spiral that is truly difficult to control. So, while it looks like the 14% hike is bad news, we need to understand that it could be worse.

Benchmarking the fare hikes to the fuel prices also seems necessary, because it allows for an automatic correction tool. End of the day, its important for the consumer to understand that paying more is a part of reality. If we don’t correct specific prices as the days go by, we will have to factor in a generic price rise that will harm all of us more. Bitter medicines are an infinitely better deal than prolonged painful illnesses.

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