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Dinesh Derailed

Dinesh Trivedi just presented a Railway Budget. He also got fired. What happened? Well, he wasn’t ‘populist’ enough that’s what happened. He apparently did not keep the best interests of the ‘aam admi’ (common man) in mind while deciding to hike fares.

Didi wants Dinesh to step out.

Mr Trivedi proposed a series of increases in Rail fares cutting across classes. The increases he proposed were given out as paise per kilometer. The opposition accused him of misrepresenting in paise what would actually be sizeable increases in passenger fare. Well here is the truth behind it, a paise/kilometer increase makes a lot of sense! The increase in rates has not been uniform across classes, for the suburban trains most indispensable for the common man, the increase comes up to Rs 2/100 kms. How many people use suburban trains to travel a 100kms? Only those people would face even a Rs 2 increase in their fares.

One thing that stands out clear is that while many support Mr Trivedi’s budget given its strong emphasis on safety , modernization and a reduction in the operating ratio, all dire requirements for the railways, very few oppose the fare increases as a whole. Not even Trinamool Congress Leader Mamta Bannerjee or her sidekick Derek O’Brien (He should have stuck with his know it all school kids at the Bournvia Quiz Contest) are opposed to fare hikes in the classes above the sleeper class, that is, the AC 2nd and 1st class. They oppose the increases in the lower classes as only that would affect the aam admi. This shows that everybody, even the hardcore communists, recognize the need to increase revenues within the railways. Before going into ways in which revenue can be increased, let’s look at why it needs to be increased.

1)      Operating ratio has to be decreased, currently 95 rupees are spent for every 100 rupees earned by the railways. The railways are owned by the government, ruining its financial health would not be in the best interests of the aam admi.

2)      SAFETY! – The Indian Railways transports a large sea of humanity. Around 30 million people travel by train every day!  Given this figure the number of accidents may seem like a relatively small percentage, however is being a part of small percentage any consolation to those who lose their lives? Small percentages translate to large numbers in India, making safety a major priority. The list of accidents can be seen here on wiki.  Safety costs money, Trivedi’s plan includes modernization of tracks, signaling systems and manning all level crossings.  The Aam admi values his life.

3)      Modernization-Hygiene- More Safety – How many of us who have travelled by our beloved Indian trains (even that really cool looking Shatabdi tween Chennai and Bangalore often preferred over flights) can call them hygienic ? The stench that accompanies  the railways is so characteristic that its considered ‘un-Indian’ to complain about it. Some of us have noticed recently with glee that the open-toilet systems are changing; many of the trains now have greener toilets (Lalu Prasad Yadav initiated this venture). Under Trivedi’s plan 2,500 more coaches would have green toilets by 2013. The open toilet system is dreadfully unhygienic, especially for those with homes near railway tracks. It also corrodes the tracks and costs the railways around 350 crores of rupees per year.

4)      Capacity! – Despite being such a large network serving countless number of people, there is always more demand for railway tickets. (We all have at some point woken up at 8am and  restlessly hit the refresh button on the tatkal bookings site of IRCTC with our fingers crossed hoping to get lucky).  Trivedi has set aside Rs 4410 crores to augment capacity.

5)      RnD (Design) – The Indian Railways don’t really look like the ones in Japan do they? The railways are a solid system and do their job well, it could do with a revamp in design though. Trivedi plans to put money into a dedicated Railway design wing at the National Institute of Design.

6)      Many more reasons can be found in the budget highlights.

To do all of the above Dinesh Trivedi has proposed borrowing from the market Rs 15,000 crores and also a nominal hike in the fares (after ten long years!).

The opposition thinks that fares should be increased only in the upper classes and not in the lower. I’d like to talk about why this is not such a great idea.

The Indian Railways is a price discriminating monopoly. Prices are different based on whether you are a student/senior citizen/physically handicapped/female senior citizen etc. Prices are different across different trains even for the same classes. The Indian railways also forces consumers to reveal their preferences by offering a range of products. All this is done with the differences in price elasticities in demand across the categories kept in mind. That is acknowledging the fact that increasing the prices have an impact on the quantity of ticket sales, and thereby on the revenue, but this impact is different across different categories.

While I do not have any data to substantiate my claims, I shall consider a case where there is a high increase in prices in the upper classes and none in the lower ones. I broadly guess that given the high fares in the AC 1st and 2nd classes and presence of low cost airlines as close substitutes, these classes would have relatively more elastic demand, that is an increase in prices would cut down travel by AC 1st class a lot, Making them a lot less competitive when compared to airlines which have a great advantage of saving on time. (Make my trip allowed me to book tickets from Delhi to Chennai by a low cost airline at Rs 4,700 as long as I booked really early, the corresponding Rajdhani ticket price on a 1st class was Rs 4,500). Some of the current AC travelers may also switch to the already overwhelmed second class sleepers given the large difference in prices, again bringing no new revenue and putting the ‘aam admi’ in further trouble with regard to lack of capacity.

For short distances buses might substitute the sleeper class trains, however as far as I have seen, the buses are more expensive than the trains and do not work very well for longer distances. Therefore the most inelastic segment of demand would be that for long distance travel by sleeper class, which is where the revenue killing has to be made. The price hike here is pretty nominal a Rs 5 per hundred kilometers is not going to put anybody off traveling.

We would all like safer more hygienic travel even if it meant shedding an extra hundred rupees. The hue and cry is over nothing. Kudos to Mr Trivedi for standing upright through this whole mess and refusing to roll back his changes despite being threatened with ouster. Those who oppose his changes should take a look at this.

 
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Posted by on March 15, 2012 in Economics, India, Politics, Society, Uncategorized

 

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