Rail fare hike: Here's why you should be prepared for sharper increases

If you thought the railway fare and freight increases announced on Friday were on the higher side, here is a shocker for you: The increase may be only the beginning of a much needed fare hike cycle.

This is because the affected increases are not enough meet to the targets set for the railways.

“The recent hike in Rail fares by a total of 6.5% for freight and 14.2% for passenger traffic is barely sufficient to meet FY15 budgeted (interim) estimates on either of the segments, and are likely to see encores in the next few quarters,” Religare Institutional Research has said in a report today.

In the interim railway budget on 12 February, then minister Mallikarjun Kharge had set a revenue target of Rs 1.65 lakh crore. This includes Rs 1.06 lakh crore from goods and Rs 45,255 crore from passenger. The balance is from other sources such as coaching. The interim budget had not increased the fares and freight rates, as elections were round the corner.

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The hikes affected on Friday, meanwhile, are expected to raise Rs 8,000 crore for the railways.

Economists have been arguing more frequent fares and freight increases. Most of them consider the latest hike as the first dose of the bitter pill Prime Minister Narendra Modi had recently advised. More are expected to follow.

Here are three points, culled from a research report by Religare, explaining the rationale behind the move:

1) Numbers do not tally: The hikes will not help the railways meet the revenue target. According to the brokerage, passenger revenue, which accounts for 26 percent of the total, the target set is 20.5 percent increase from Rs 37,500 crore last financial year (revised estimate). This would imply an additional 5 percent volume-led growth. For freight, the revenue growth estimate is 12.5 percent, with a volume growth of 4.7 percent. “Clearly the 6.5% figure we see now is not the last this fiscal. Even if the revised Rail Budget in July retains the estimates made in February, we are likely to see further hikes in the next few quarters, freight and passenger included,” the brokerage has said.

2) Losses in passenger segment: The passenger segment has been running on huge losses. According to the report, the average suburban passenger travels 34 km in a train journey, and pays Rs 0.13 per km. Meanwhile, the long-distance traveller pays Rs 0.3 per km. A majority of the railway passengers’ ticket charge stands at Rs 0.16 per km. The wide gap is clearer when this is compared with bus charge in Mumbai - Rs 3 per km. The report estimates that the railways is incurring Rs 26,000 crore losses annually in running the passenger trains.

3) UPA hiked fares just twice: For the last more than 10 years, passengers had a great time on the train: Their ticket charges were increased just twice. According to the report, the latest increase is the third in the last 11 years. No government had the political will to increase the fares from 2003 to early 201, it notes. Meanwhile, fuel charges have increased phenomenally. As part of the reforms towards the fag end of the UPA’s tenure, diesel prices were partially decontrolled. “…Fares have risen by 15% over this period, while fuel costs have topped 50%,” notes the brokerage. Clearly, this policy that defies all economic logic and will have to made good for.

All in all, the railways has no way out. It will have to resort more such hikes to sustain itself, even if the interim budget in July retains the revenue targets set in the interim budget, says the brokerage.