IR overstates its losses from ‘Social Obligations’ by Rs.6000 Cr./Annum: Bibek Debroy

Suresh Prabhu may be reluctant to hike passenger fares, especially in the sleeper/ordinary class, but an analysis by NITI Aayog member Bibek Debroy and OSD Kishore Desai shows he can raise fares in this class by 1.5-2 times and still keep passenger welfare unchanged and keep passengers happy! Bibek Debroy says Railways overstates its losses from “social obligations” by Rs 6,000 crore per year.

passenger-faresNew Delhi: Railway Minister Suresh Prabhu may be reluctant to hike passenger fares, especially in the sleeper/ordinary class, but an analysis by NITI Aayog member Bibek Debroy and OSD Kishore Desai shows he can raise fares in this class by 1.5-2 times and still keep passenger welfare unchanged. Debroy/Desai break up the FY15 losses of Rs.33,000 crore into that in various classes and find the largest losses of around Rs.19,000 crore took place in the second-class category, followed by Rs.9,000 crore in the sleeper class. AC trains, where Prabhu has just started a surge-pricing strategy, by contrast, roughly break even — while the AC tier-II made Rs.496 crore of losses in FY15, the tier-III made a profit of Rs.882 crore.

Inefficiency, the analysis says, in cost structure also significantly contributes to the losses in passenger service business and hence tariff hike cannot be the only mechanism to address such social costs. It has to be complemented by cost optimisation and non-fare box revenue enhancement strategies with varying levels for various classes.

Given it is the relatively well-heeled that travel in the Railways’ air-conditioned coaches, it is not surprising that Railway minister Suresh Prabhu has chosen to focus his surge-pricing strategy here—given that rail travel will still be cheaper than air, this may not be a losing strategy, at least in the short run. But even if you assume that passengers will not migrate to airlines despite the much-shorter travel times, estimates are the Railways won’t earn more than Rs.500-700 crore in a year through the surge strategy. That’s hardly going to move the needle, given the Railways lost around Rs.33,000 crore in the passenger segment in FY15.

Should Prabhu and prime minister Narendra Modi wish to be more aggressive in cutting these losses, an analysis by NITI Aayog member Bibek Debroy and officer on special duty Kishore Desai has some important pointers. While their Rs.33,000 crore estimate of passenger losses in FY15 is not very novel—they do point out, though, that a fifth of this is due to inefficiencies in Railway operations—what is interesting is the results of the disaggregation analysis. Not surprisingly, the largest losses of around Rs.19,000 crore in FY15 took place in the second-class category, followed by Rs.9,000 crore in the sleeper class and Rs.4,500 crore in the suburban/metro category—the air-conditioned category breaks even though the expensive AC I class actually loses money, making it unclear why that has not been abolished.

“Analysis shows that 20 per cent more losses in sleeper and non-AC services are on account of Railways’ cost structure and not lower tariffs,” Debroy told

In the Delhi-Lucknow segment, Debroy/Desai find the second-class train fare is Rs.185 versus a staggering Rs.420 by bus, more so when you consider a bus journey is so much more uncomfortable; for a Delhi-Chandigarh journey, the comparative numbers are Rs.110 and Rs.200—for the air-conditioned class, train journeys are more expensive, costing Rs.1,140 for Delhi-Lucknow versus Rs.900 for a comparative bus journey. At an aggregate level, this means that while higher train fare can trigger a migration to buses in the AC segment, fares in the sleeper/second-class are 60-100% cheaper than bus journeys. Given bus journeys, especially over longer distances, are not as comfortable as trains, what this means is there is considerable scope for Prabhu to hike passenger fares in the lower categories and still keep passengers happy. It is no one’s suggestion that train fare in the lower categories be doubled but the Debroy/Desai analysis suggests that, at the margin, passengers will still be better off.

Railways is trying to move to accrual accounting system, but the project is hit by slow pace. The report says that in the present context, when Centre is considering to merge the Rail Budget with the General Budget, a need is being felt to examine the financial impact of social service obligations in the passenger transport business.

It is when this is disaggregated into per-kilometre fares and compared with bus fares that the real lessons emerge. The average fare in the air conditioned class turns out to be Rs.2.52 per passenger per kilometre versus Rs.1.78 for a comparable bus journey, suggesting that for shorter distances, the railways may lose traffic to buses. But for the non-AC and second-class/ordinary classes, buses are 1.6-2 times as expensive — given the railways are more comfortable than buses, passenger welfare will rise even with significant fare hikes.

Going by that comparative analysis with bus, the AC classes charge much more while the non-AC classes charge less than their roadways counterparts, it says. In non-AC classes, the potential under-recovery (comparatively) is as much as 60 per cent in Sleeper and 99 per cent in General compartments. However, it adds that for non-AC segment, railways may provide a better travel experience than roadways. By the same indicators, the AC classes in these sectors has the scope to decrease fares to be competitive with the roadways, hypothetically.

The report makes a mention of the freight business saying the “distortions” in freight rates, wherein freight is charged high should be avoided as it is “unhealthy for the economy” as the rates are ultimately passed on to consumers through higher costs of electricity, cement, steel etc.

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