Indian Railways: getting the tariffs right

The transformation of Indian Railways will be complete only if the next transformation, if and when required, does not involve much of a role by the minister

Kunal Singh

Photo: Ramesh Pathania/Mint

Concluding the railway budget speech of 2015-16, the minister of railways Suresh Prabhu narrated the famous quote of Swami Vivekananda: “Take up one idea. Make that one idea your life—think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body be full of that idea, and just leave every other idea alone. This is the way to success.” Prabhu further added: “For me, that idea is the transformation of Indian Railways. We can, and will, turn the Railways around. We will fulfil the Prime Minister’s vision for the Railways.”

If the minister is as dedicated to the transformation of Indian Railways as he says, this is indeed commendable. But there is a question here. What constitutes the transformation of Indian Railways? Prabhu’s success in transforming the Indian Railways is contingent on, in my opinion, no other minister in the future making a statement like his. The transformation of Indian Railways will be complete only if the next transformation, if and when required, does not involve much of a role by the minister.

In other words, Prabhu should strive to make Indian Railways an autonomous entity. But this transformation is easier said than done. What are the obstacles? Primarily two, though one can always make a longer list. The first issue is of pricing. This is a standard argument which most of us, who care a bit about the railways, understand. The passenger tariffs haven’t kept pace with growing wage bill of the railway staff and other input costs. Being a deeply political issue, any hike in passenger tariff is seen as an anti-aam aadmi move and hence governments develop cold feet.

Most of us also know that the passenger trains don’t earn enough to sustain themselves. Hence, a portion of their expenditure is borne out of the revenues generated by the freight trains. While the high and uncompetitive tariffs of the freight trains make it difficult to sustain this cross-subsidy mechanism, there is a still bigger problem: one does not exactly know the extent of cross-subsidy.

As noted in the report prepared by a committee chaired by Bibek Debroy (full disclosure: I was assisting Partha Mukhopadhyay in his role as the member of this committee): “...IR [Indian Railways] doesn’t follow a commercial accounting system. Therefore, one doesn’t quite know the accounts for fixed railway infrastructure, passenger traffic, freight traffic, suburban railways and the production and construction unit... Proper accrual-based double entry accounting system bifurcated cleanly into capital transactions and operations and commercial accounts, enables one to know the precise extent of subsidization.” So one can clearly see that every year the railway minister undertakes the ritual of presenting railway budgets and vows to pull the railway out of its troubles, while not at all knowing how deep the trouble runs.

In fact, Bibek Debroy committee also points out that one even does not know the cost of a particular train, so in effect one does not know what profit or loss a particular train returns. One even does not know which of the 17 zones of the Indian Railways returns profit and which of them don’t. But that has not deterred the ministers from announcing new trains or fiddling around with the number of zones.

For a long time, a tariff regulatory authority was being peddled as a panacea. An independent regulator would de-link the tariff determination from the politics of the days – was the naïve argument. Unless the aforementioned questions around the extent of subsidy and costs of services are resolved, any price discovery by regulator would at best be an intelligent guesswork.

In an ideal scenario, the best discovery of tariffs is availed through—and this brings me to the second issue at hand—market competition. Since the issue of creating competition is closely intertwined with several questions around regulation, I will cover them all in detail in my next column. For now, it should be mentioned that the Bibek Debroy committee feels there exists adequate competition—between road and rail—for the freight tariffs to be left to the market. The Committee however left the final decision on the passenger tariffs on the political executive. Fair enough, trains still don’t have much of a competition for a large number of masses in this country, especially for long distance travel.

If the committee recommendations are accepted, the regulator (the creation of one is underway) will recommend the passenger tariffs and the ministry of railways will take the final call. The committee did not go into this, but I hope the regulator introduces some kind of differentiation in its tariff recommendation. The per-kilometre tariff on Mumbai-Delhi route should not be the same as that on Lucknow-Jaipur route, the class of travel being constant. Similarly the per-kilometre tariff for short distance trains should be different from that of long distance trains because the former, more than often, has good competition from the roads. One can think of more such differentiating criteria.

If the regulator brings these kinds of differentiation—and this will be the efficient thing to do—the regulator will need the data currently unavailable, as stated before, for better price discovery. Hence, the accounting reforms are the most urgent in nature.

The next column will also dwell more on the issue of creating competition, because that alone can help make Indian Railways an autonomous entity.

This is the first in a two-part series on Indian Railways.