Bringing Indian Railways back on track: Reasons behind its bad financial health and how it can optimise fare pricing

Published: October 19, 2018 2:05 AM

One of the reasons for the Indian Railways’ bad financial health is its suboptimal fare pricing. Recent pricing policy decisions have added to the Railways’ problems. The willingness-to-pay surveys on the ticketing portal could help streamline and optimise railway fare pricing.

railways, indian railways, railway sector, railway industryIllustration: Rohnit Phore

The Indian Railways has been incurring big losses and registered undesirable operating ratios that indicate its precarious financial health for quite some time. The operating ratio in the case of the Indian Railways implies the sum that the transporter spends in order to earn a rupee’s revenue, and is a key measure of efficiency. To be precise, the operating ratio was 90.5% in 2015-16, 96.5% in 2016-17, and 98.5% in 2017-18. The fare-freight ratio (the ratio of the average passenger fare to average freight rates) of the Indian Railways is 0.3, compared to 1.4 in South Korea, 1.3 in France, 1.2 in China, 0.9 in Malaysia and Indonesia, and 0.7 in Thailand. Skewed fare pricing has huge implications for inflation since transport costs have large knock-on effects on inflation and other macroeconomic variables. Railway fares have stagnated for years and fare prices have lagged behind general inflation.

A recent CMIE report projects that the domestic passenger traffic will grow by 19.2% in 2018-19. The Indian Railways needs to invest a humongous amount of money to meet this additional passenger and freight traffic and other expenditures such as station redevelopment, platform decongestion, laying of new tracks for both passenger and freight trains, track renewal, creating rolling stock, and dedicated freight corridors. However, its near-100% operating ratio hardly leaves any money for the Indian Railways to invest on its own. Therefore, raising passenger fares has become a policy imperative. The highest ever operating ratio since 2001 recorded in FY17 recently made the CAG to bat for a fare hike.

As a state-run service provider competing with alternative modes of transport, the Indian Railways has always (except a few recent policy innovations) adopted marketing policies that were applicable to all the zonal segments across the board. One recent exception is the introduction (and possible rollback soon) of dynamic pricing or surge pricing for fast trains such as Rajdhani, Shatabdi and Duronto trains. According to an article published in the Economic & Political Weekly (titled “‘Surge’ Pricing for Railway Tickets as Tax by Stealth”) in February and written by the authors of this article, such surge pricing has led to a suboptimal outcome of weaning travellers away from trains to airlines, and has acted as a ‘tax by stealth’ measure. A recent CAG report also corroborated this line of argument.

Then, the question arises, how can the Indian Railways optimally price its fares so as to increase its revenues? There could be some potential sources of investment worth considering. For example, the Indian Railways can raise additional finance through (1) smart advertisement space-selling, akin to the Delhi Metro, (2) selling surplus and potentially unusable land, (3) by developing commercial zones/shopping malls near the station area, (4) by developing parking areas in railway stations, and (5) by raising rail fares. It is highly likely that the Indian Railways administration might have studied some or all of these ways and means. Devising optimal fund-raising mechanisms is key.

A fundamental way of increasing profits of a firm is to undertake an optimal pricing strategy. Railway fare pricing in a country with huge diversity and scale is a very complex subject as the socio-political obligations make the task of pricing harder.

We suggest the Indian Railways conduct passenger surveys for optimal fare pricing. In applied microeconomic research, a well-known way of obtaining consumer preferences is to undertake sample surveys so as to assess consumers’ willingness to pay (WTP) for the good. Such WTP surveys to assess consumer demand for rail travel or other transport services are nothing new and have been implemented in countries such as Japan, Italy and Colombia. The simple idea is that, to discover optimal rail fares, the Indian Railways can execute a survey of passengers asking their WTP for a particular class of travel. Unlike other government surveys, the advantage here is that it is not controversial since passengers themselves are expressing their WTP.

The survey can be implemented in two ways.

One, on the IRCTC website, passengers can be asked questions while booking ordinary tickets (not Tatkal tickets) online. The first question could be about whether a consumer thinks the price s/he is paying for this journey reflects the actual cost of journey? The second question could be about whether s/he would want to pay more for this trip? The third, if yes, how much more s/he is willing to pay for the journey (for sleeper, 3AC, 2AC, 1AC)? On the face of it, anecdotal/media evidence suggests people might be ready to pay more for sleeper coaches, whereas AC coaches would witness decline in WTP. These questions should be made compulsory to book online tickets on the IRCTC website. On top of the survey pop-up links, it can be mentioned that the Indian Railways covers only, say, 57% of a traveller’s journey, or your journey is subsidised by freight service, or the Indian Railways’ operating cost is 98%, leaving no money left for additional investments, and things like that. At the same time, the Indian Railways must mention that they are going to reduce either time delays, increase punctuality, reduce accidents and so on. The WTP surveys can also be done on social media such as Facebook and Twitter.

Two, field surveys can be undertaken for each zone. However, social media or field surveys will be much more prone to noise and misreporting. We believe this will not only help revive the financial health of the Indian Railways, but also efficiently streamline and optimise pricing for each journey and route. The efficacy of a WTP survey on the IRCTC portal should not be subject to misgivings, as it is obvious that noise or respondent biases can be dealt with and accounted for by new-age statistical and econometric methods at the data analysis stage.

Blinkered policy vision on pricing and operations has adversely affected the Indian Railways. It is a pity that a public sector behemoth with strong passenger and freight traffic demand is struggling to sustain its growth path. Rail pricing policy must be optimal and there is no other way out.

By Santosh Kumar Dash and Sitakanta Panda. Dash is a Researcher at CEFT, Bhubaneswar, and Panda is Assistant Professor of Economics at IIM Amritsar. Views are personal.

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