The Indian Railways has been incurring big losses and registered undesirable operating ratios.
It needs a holistic assessment to improve the financial health and operational efficiency.
How is Indian Railways at present?
Operating Ratio is the sum that the transporter spends in order to earn a rupee’s revenue.
It is a key measure of efficiency, with higher percentages indicating lower efficiency.
The operating ratio for Indian Railways was 90.5% in 2015-16 and increased to 96.5% in 2016-17, and 98.5% in 2017-18.
Fare-freight ratio is the ratio of the average passenger fare to average freight rates.
For Indian Railways, it is 0.3, compared to 1.4 in South Korea, 1.3 in France, 1.2 in China, 0.9 in Malaysia and Indonesia, and 0.7 in Thailand.
The skewed fare pricing has huge implications for inflation as transport costs have large effects on inflation and other macroeconomic variables.
Railway passenger fares have stagnated for years and fare prices have lagged behind general inflation.
Should fares be hiked?
It is projected that the domestic passenger traffic will grow by 19.2% in 2018-19.
Certainly, Indian Railways has to invest a huge amount of money to meet this additional traffic.
Besides this, other expenditures include that for station redevelopment, platform decongestion, laying new tracks, track renewal, creating rolling stock, and dedicated freight corridors.
However, the near-100% operating ratio hardly leaves any money for the Indian Railways to invest on its own.
The highest ever operating ratio since 2001 recorded in FY17 recently made the Comptroller and Auditor General to call for a fare hike.
Therefore, raising passenger fares has become a policy imperative now.
Challenges - Indian Railways is a state-run service provider competing with alternative modes of transport.
Given this, it has always adopted marketing policies that were applicable to all the zonal segments across the board.
A recent exception is the introduction of dynamic pricing or surge pricing for fast trains such as Rajdhani, Shatabdi and Duronto trains.
But such surge pricing has led to a suboptimal outcome of shifting travellers to airlines.
So the Indian Railways optimally pricing its fares so as to increase its revenues remains challenging.
What could be done?
Additional finance - Indian Railways can raise additional finance
through smart advertisement space-selling, akin to the Delhi Metro
by selling surplus and potentially unusable land
by developing commercial zones/shopping malls near the station area
by developing parking areas in railway stations
by raising rail fares
Given these options, devising optimal fund-raising mechanisms is the key.
Pricing - With India's huge diversity and scale, optimal pricing is very complex as the socio-political obligations make it harder.
The Indian Railways can thus consider conducting passenger surveys for optimal fare pricing.
Sample surveys could be undertaken to assess consumers’ willingness to pay (WTP) for the good.
The IRCTC website and social media platforms such as Facebook and Twitter can be used as medium, besides field surveys.
WTP surveys to assess consumer preferences in transport have been implemented in countries such as Japan, Italy and Colombia too.
