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  1. Only fare hikes can’t deal with Indian Railways’ Rs 33,000 cr losses

Only fare hikes can’t deal with Indian Railways’ Rs 33,000 cr losses

A NITI Aayog study has found that inefficiency in the cost structure is also a major contributor to the losses and cost optimization and non-fare revenues also need to be tapped to deal with the losses in the passenger segment.

By: | New Delhi | Updated: September 14, 2016 6:35 PM
A NITI Aayog study by Bibek Debroy and Kishore Desai has now analysed the social costs of the Indian Railways (IR) and has suggested ways to deal with the issue. (Reuters)

A NITI Aayog study by Bibek Debroy and Kishore Desai has now analysed the social costs of the Indian Railways (IR) and has suggested ways to deal with the issue. (Reuters)

santosh-tiwari-s A NITI Aayog study has found that inefficiency in the cost structure is also a major contributor to the losses and cost optimization and non-fare revenues also need to be tapped to deal with the losses in the passenger segment.

At a time when it looks certain that there will be no Rail Budget presentation from the next year in Parliament and it will be clubbed with the General Budget, the critical question to be answered is how will the Indian Railways’ social cost associated with the subsidisation of the passenger fares be tackled going ahead.

A NITI Aayog study by Bibek Debroy and Kishore Desai has now analysed the social costs of the Indian Railways (IR) and has suggested ways to deal with the issue.

The interesting part is that the paper based on the study says that, “….inefficiency in IR’s 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. It has to be necessarily complemented by cost optimization and non-fare box revenue enhancement strategies with varying levels for various classes.”

It points out though ‘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, IR will have a limitation on increasing fares (i.e revenue side) which would be driven by competition,” the paper has added.

In FY15, lower tariff levels in non-suburban services (across all classes – AC, SL, 2nd class etc.) accounted for about 73% of the total social service obligation costs, and the study has found that tariff levels of SL and 2nd class service are substantially lower than competing service offerings (equivalent bus fare rates), while ‘AC services are reasonably higher than the bus fares’.

So, the losses in AC class could be attributable to higher base cost structure of IR than to its fare structure.

“Similarly, for sleeper and second class services, IR over-estimates the quantum of losses that could be attributable to lower tariff levels. Analysis indicates that about 80% of losses in these classes could be attributable to lower tariff levels while the balance 20% are more likely to be attributable to IR’s cost structure,” according to the study.

As per the IR estimates, its passenger business incurred a loss of about Rs 33,000 crores in FY15, on account of its social service obligations.

“The total revenue, attributable to the passenger business, was around INR 49,000 crores. Hence, the above loss essentially amounted to around 67% of its passenger revenues. Effectively, this meant that for every 1 Rupee earned in its passenger business, IR ended up expending Rupees 1.67.”

So, along with the scrapping of the Rail Budget presentation, the government has to find a model for dealing with the social cost of IR in an effective manner.

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