Rail Regulator: Will populism be put aside to hike passenger fares, rationalise freight rates?
The cost of transporting freight is only 99 paise per 10 km but the charges the Railways levies are Rs 1.60 per 10 km. But on the passenger side, charges are a mere 50 percent of the cost of service – 36 paise per 10 km against the actual cost of 70 paise per 10 km
New Delhi: The Railways will shortly be getting a regulator, a body which will fix fares among other responsibilities. The Railways carries almost 23 million passengers daily, is the world’s largest employer and has traditionally been keeping passenger fares low while using high freight rates to cross subsidise the consequent losses. This way, the Railways manages to lose out on both, passenger and freight earnings – the former because prices are artificially set low leading to lower realisations and the latter because now, Railways’ freight charges are higher than competition like roadways. Will this model change with the regulator’s arrival? Passengers wont like this for sure if the new body recommends a fare hike. It may also suggest ways of rationalising freight rates. Though the government is not bound by the regulator’s suggestions, it would do well to pay heed to these suggestions. Cross subsidization is already bleeding the Railways dry.
Sample this: The decision to merge the Railway Budget with the Union Budget should have saved the Railways payment of dividend to the General Exchequer: this comes to Rs 9,731.29 crore for the year 2016-17. This would also mean that alongside, Rs 4,301 crore expected from the Ministry of Finance as subsidy on payment of dividend, would not be coming in. So the net benefit of waiving the dividend for the year 2016-17 would be Rs 5,430 crore.
A Parliamentary Standing Committee on Railways has noted that this entire net benefit of Rs 5,430 crore would be utilised to “partly meet the shortfall in traffic earnings of Railways assessed at Rs 12,665 crore in the revised estimates during 2016-17. The Committee finds that the very purpose of removing the dividend liabilities is defeated when they are not utilised in creating assets or increasing net revenue of Railways.” In effect, what this means is that even after the merger of the Railway Budget, there is hardly any financial benefit precisely because of populism dictating passenger fares.
The mechanism of getting a sector regulator to set tariffs after a careful study of costs and other aspects has been successful in some other sectors like airports (Airports Economic Regulatory Authority), telecom (TRAI), electricity etc. It remains to be seen if the same rate of success is achieved in Railways, which remains quite prone to populism, never mind assertions to the contrary.
This piece shows why despite the Railway Budget now being merged with the Union Budget, populism continues to rule the Railways. Just about six months after it introduced a flexi-fare system in select trains, on the lines of the fare mechanism followed by airlines, Railways Minister Suresh Prabhu wants to revise it. The earlier version allowed only 10 percent of the seats to be sold in the normal fare category and thereafter, prices were to increase by 10 percent with every 10 percent of berths sold, with a ceiling of 50 percent. The piece says now, the Railways is considering either raising the basic fare by 15 percent flat or reserving about 50 percent berths in premier trains for normal fare. In effect, flexi-fares will not be as flexible as before.
Similarly, even on something like a nominal service charge for online booking of Railway tickets, Minister Prabhu has bowed to populism by waiving this levy. Experts say this small levy on booking tickets through IRCTC website enabled the Railways to earn anywhere between Rs 100-150 crore each year. Some of this amount was then ploughed back to enhance ticketing infrastructure etc.
In its report tabled in Lok Sabha last month, the Standing Committee quoted earlier has pointed out how there could be a possible glaring shortfall in passenger earnings in 2016-17. It has based this observation on the fact that almost a third of the earnings the Railways had projected in the budget estimates for 2016-17 had not been earned till January. This, after the passenger earnings target was anyway revised down to Rs 48,000 crore from Rs 51,012 crore at BE 2016-17. The actual earning till January was only Rs 34,535.72 crore. The committee has said that the Railways will likely miss the lower, revised passenger earning target too, which means the element of cross subsidization with freight earnings will remain strong this fiscal as well.
It is no surprise that the latest audit of the Railways by the Comptroller and Auditor General (C&AG) for FY16 has also made similar remarks on stopping this long-held practice of using freight earnings to subsidize passenger fares.
“Ministry of Railways needs to revisit the passenger and other coaching tariffs so as to recover the cost of operations in phased manner and reduce losses in core activities. Operational losses on running suburban train services and on account of facility of free/concessional/complimentary passed to various classes of passengers need to be curtailed,” the CAG has said in one of its recommendations. The CAG report was also tabled in Parliament last month. It found that the Railways earned a profit of Rs 38, 312.59 crore from freight services in FY16 and used 88.28 percent of the profit from freight traffic to underwrite the loss on passenger services and addition of coaches.
Meanwhile, the Parliamentary Standing committee has noted that for 2016-17 there will be a Rs 3,000 crore shortfall in passenger revenues and Rs 9,000 crore in freight earnings. Here’s the extent of cross subsidisation: The cost of transporting freight is only 99 paise per 10 km but the charges the Railways levies are Rs 1.60 per 10 km. But on the passenger side, charges are a mere 50 percent of the cost of service – 36 paise per 10 km against the actual cost of 70 paise per 10 km.
“The ministry has submitted before the committee that this trend of cross-subsidising the revenues from goods to passenger traffic is not good for economy as it would lead to increase in logistic of goods which is already one of the highest in India at around 13 percent of cost of goods. The committee is in agreement with the view of the ministry that providing cross-subsidy is neither good for the health of economy nor is it sustainable for the Railways and much of its business shifts to other modes of transport.” Lesson? The bitter pill of a hike in passenger fares will have to swallowed sooner rather than later.
That all is not well with the current business model of the Railways is evident from another statistic: The Parliamentary committee also found that net revenue target for 2017-18 has been fixed at Rs 8,948.37 crore. In the current fiscal, it has already been revised downwards to Rs 7,695 crore in revised estimates from Rs 18,210.64 crore in budget estimates, a roll back of Rs 10,515.6 crore.
“The committee notes that such a huge reduction in net revenue to the extent of more than 50 percent has never occurred except for the year 2016-17. The committee strongly feels that there is an urgent need to arrest the declining net revenue. The committee agrees with the ministry that the focus on increasing the share of non-fare revenue resources, strict austerity measures to control expenditure, improved man-power planning, better asset utilization, inventory management and optimizing fuel consumption are some of the measures to bring the Railways’ finances in right shape.”
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