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Inefficiency in railway cost structure leads to losses: Niti Aayog

The government's apex policy-making body suggested that the national transporter will have to work on cost optimisation measures and enhancing its non-fare revenue.

By: | New Delhi | Updated: September 15, 2016 6:33 PM
Fare hike is not the only way to deal with losses of Indian Railways in passenger services business, Niti Aayog said. (PTI) Fare hike is not the only way to deal with losses of Indian Railways in passenger services business, Niti Aayog said. (PTI)

Fare hike is not the only way to deal with losses of Indian Railways in passenger services business, Niti Aayog said, revealing that the “inefficiencies” in the cost structure also contribute to it.

The government’s apex policy-making body suggested that the national transporter will have to work on cost optimisation measures and enhancing its non-fare revenue.

“… inefficiency in Indian Railways (IR) cost structure also significantly contributes to the losses in passenger service business and hence, tariff increase cannot be the only mechanism to address such social costs,” the study noted.

The note — Impact of Social Service Obligations by Indian Railways — was prepared by Niti Aayog Member Bibek Debroy and an Officer on Special Duty, Kishore Desai.

According to the study note, the losses in passenger services business has to be necessarily complemented by cost optimisation and non-fare box revenue enhancement strategies with varying levels for various classes.
As per the data, in 2014-15, lower tariff levels in non-suburban services (across all classes — AC, SL, 2nd class, etc) accounted for about 73 per cent of the total social service obligation costs, the study revealed.

At an overall level, IR’s estimates indicate that the financial impact of under-recoveries due to lower tariff in non-suburban services is expected to be about Rs 28,000 crore while a review indicates that this could more reasonably put at around Rs 22,000 crore, considering the competitive market dynamics in estimation, it said.

It stated that for AC classes, the average tariff level is higher than equivalent fares for an AC bus service.

“Hence, it is likely that losses in AC class are attributable to higher base cost structure of IR than its fare structure,” the study said.

Indian Railways will accordingly need to explore alternative cost optimisation and expenditure control strategies to recover such losses, it suggested.

The analysis of the data also indicates that about 80 per cent of losses in these classes could be attributable to lower tariff levels while the balance 20 per cent are more likely to be linked to Indian Railways’ cost structure.

But it is categorical that while lower tariffs and concessions substantially contribute to losses in passenger business and hence account for social service costs, they are not the only factors.

In a competitive market where demand for transport is elastic, Indian Railways will have a limitation on increasing fares (i.e revenue side) which would be driven by competition, the study said.

“Hence, computation of under-recoveries will have reference to IR’s ability to charge fares in a competitive market rather than its cost structure determining its under-recoveries,” it added.

The study states: “Effectively, Indian Railways ends up treating its goods business as a tool to more than make up for its passenger business losses to manage overall financial situation.”

Such a practice of over-charging goods customers is actually “unhealthy” for the net economy as higher goods tariffs are eventually passed on to the public in the form of higher electricity cost, higher cement and steel costs, it said.

This practice also distorts the inter-modal share, leading to customers preferring sub-optimal choice of modes such as roads, according to the study.
Taking a holistic view, it suggested that steps to address social costs of passenger service business should necessarily be taken along with measures to rationalise goods tariff distortions.

As per the numbers for 2014-15, while Indian Railways’ passenger business incurred a net loss of about Rs 33,000 crore, its goods business made a profit of about Rs 44,500 crore.

The White Paper on Indian Railways, published in February 2015, indicated the extent of imbalances/tariff distortions in the goods business.

The paper shows that for 2012-13, Indian Railways recovered about 164 per cent of the cost per NTKM (net tonnes kilometres or transportation of 1 tonne goods for 1 km) from its goods business.

This means that for every rupee spent on the goods business, Indian Railways recovered Rs 2.64 from goods customers. This continues even today, it added.

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