IR had started printing "IR recovers only 57% of cost of travel on an average" on the computerized printed tickets issued to passengers since about 22.6.16 (in addition to messaging the same in IRCTC website). It means that IR recovers only 57% of the expenses incurred for passenger transportation through sale of tickets (of all classes). IR is thus conveying a message to its passengers that they has been given a subsidy of 43%, or in other words, IRlys is incurring heavy losses to the tune of 43% on carrying passengers.
It may be noted that the figure pertains to non-suburban passengers only. In case of suburban passengers (ones travelling in local trains in metro cities), the recovery is mere 37%.
The above message of IR is plain & simple, but
Following are the million dollar questions the circulated message give rise to.
Why this message is being circulated?
What its significance with respect to its timing?
Are there any hidden messages to be understood?
What is the story behind it?
In fact there is a long and interesting story behind this small & simple message.
WHY IR IS LOSING ITS PASSENGER BUSINESS
IR operation – Huge dimensions
IR runs about 13000 passenger trains daily to carry about 850 crore passengers per annum (including suburban & non-suburban) of which above 90% are non ac passengers travelling in suburban trains, ordinary coaches of passenger/ express trains, and sleeper class. IR also operate about 7000 freight trains every day in order to carry over 110 crore tonnes of freight every year.
History of IR Management? or Administration? Is IR – a Business? or a Political? Organisation
Since many decades, successive Railway Ministers (RM) have avoided the reasonable and necessary increase in passenger fares (to take care of inflation and improvement in services), to the extent possible, especially of lower (non-ac) classes, in order to give relief to poor people who travel in these classes. Over the period of time (especially since last 10-15 years), this practice had degenerated into extreme political expediency were by RMs (mostly of regional political parties) had used IR as a tool to enhance their political/electoral prospects (esp.in their states). Every RM competed with the predecessors to become a bigger champion of poor (vote bank). To make up for losses due to lower passenger fares, RMs used to indiscriminately increase the freight charges. Increased freight charges made commodities costlier after a due period of time which hit the people indirectly. People were too naïve to understand the ill effects at the time of rail budget. When hit by price rise at later stage blamed state & central govts and not the RM.
As a result, the total fare structure of IR got badly skewed over the period of time. Today, fare per passenger-Km (PKM) of IR is one of the lowest in the world and fare per Ton-Km(TKM) of freight of IR is one of the highest in the world. As per world bank report (2012), even after adjusted to “Purchase Power Parity”, the fares per PKM of China/Russia/Germany/Japan are hefty 270/670/620/940 % of India, where as fares per TKM of china/ Russia/ USA are only 58/75/51 % of India. Expenditure incurred by IR to operate all the passenger trains is about 25% more than the expenditure incurred in operating all the freight trains. Whereas the revenue earned from passenger business is about half of the revenue earned from the freight trains. This cross subsidization has achieved gigantic dimensions over decades. Today, losses from the passenger business has risen to above 33,000 crore Rs per annum!
IR continuously failed to fulfil the freight traffic as well as passenger traffic demanded by the growing Indian Economy. Major freight & passenger traffic shifted to road due to financially imprudent (and politically expedient) management of IR and very little capacity augmentation and improvement in services brought in by IR. On the other hand roadways were efficient and lapped up the major chunk of the incremental traffic offered by the rapidly developing Indian Economy.
IR DEBACLE IS A HUGE NATIONAL LOSS
Railways being more energy efficient and cheaper mode of transport than road and air, IR is supposed to carry a major chunk of national traffic so that the logistics cost of our country is low. Logistics cost is about 14% of GDP for India as compared to global benchmark of 8-9%.
Share of IR in national freight and passenger transport was about 89% and 74% respectively at the time of independence had fallen to about 30% & 12% respectively and is continuously falling. GDP of India is about 140 lac Crore Rs. India can save about 4 lac crore Rs per annum if it can reduce its logistics cost by 3% from present level of 14% to about 11% by efficiently carrying maximum traffic through rail and waterways instead of Road and air ways! This is a hidden loss every year our country is losing due to poor logistics mainly due to its inability of IR to efficiently carry majority of its freight and passenger traffic. Present Govt is probably the first govt, since independence who is trying its level best to put the Indian Economy & GDP into fast growth trajectory through improvement in national logistics. It is trying hard to bring in huge investments in Indian Railways, inland water ways & ports (Sagar Mala, Port connectivity project etc.)
IR- Present financial condition
With the implementation of 7 th pay commission, salary and pension component shall gobble up 68% of total revenues of IR. IR is hardly in a position to meet other necessary expenditures like fuel (diesel & electricity) bills, rolling stock procurement, maintenance of PWay/Rolling stock/eqpts, dividend to Central Govt, interests on loans depreciation funds etc. Repayment of huge loans taken by IR in the past for construction new railway lines most of which are financially unjustified with low rate of returns (taken up for political considerations) is a tall order. So IR is presently in dire straits with bankruptcy staring hard in near future.
Higher passenger fares is a necessity
Today IR is raising even more loans from the market for much needed capacity augmentation (mainly doubling/ tripling of lines) to meet the unfulfilled demand. Whereas actual revenue generation of IR for the current year is short of the expected budget estimates by a huge margin of 9%. Now IR is left with no choice but to take politically uncomfortable step of increasing passenger fares so that the passenger subsidy losses can be reduced. The message printed on the tickets since last 3 months is a way to mentally prepare the ALL the passengers to be ready for substantial fare hike in near future.
Analysis of the loss in passenger business
IR is not giving subsidy to all the passengers. According to a study recently conducted by Niti Ayog on impact of the social service obligations on IR, it was concluded that IR is earning from ACIII passengers, losing marginally from ACC, ACII, AC1 passengers, losing heavily from SL passengers and very heavily from ordinary second class & suburban passengers. The fares of AC classes in Rajdhani/Shatabdi trains were found to be 15% to 73% higher than the equivalent luxury Volvo buses in some of the important routes. Second class reserved seat fares in buses are 30% to 120% higher in buses as compared to equivalent second class seat/berth in IR on same routes. Rly fares in unreserved classes are even more subsidized as compared to corresponding bus fares.
So the marginal losses incurred in ac classes (except ACIII) are not due to underpricing but due to higher input costs of IR. In other words, inefficient IR is consuming much more resources for operating trains than it should be, which is reflecting badly on the costing of seats/berths offered to its passengers. Fares of non ac classes are severely underpriced as compared to bus. The Niti Ayog recommends increase in non ac fares as ac fares are already higher than the economic value of the services.
Options before the Govt.
IR is hard pressed to increase its revenue on one hand and on the other hand it has many political compulsions. Precedence set by the successive Rly Ministers in past 15 years have created an environment where increasing second class railway fares (which had been held almost constant since more than a decade) is a political taboo. One of the RMs who dared to increase second class fare have to lose his job. With poor strength in Rajya Sabha & recent defeats in some of the state elections like Bihar & Delhi, and the approaching state elections in UP, Central Govt. is not in a position to raise second class general fares and give opposition any chances to flex the muscles and raise anti poor rhetoric against it. Many small steps to increase the revenue by increasing cancellation charges, platform ticket charges, withdrawal of berth/ seat allocations to child concession, increasing other indirect charges had been taken in recent past.
With poor (80-90% remain untouched) IR have to focus on the top 10-20% for extra collection. Riches (top 1%), who in our country are usually one step ahead of our Govt, are lucky here too. They can always switchover to air travel/ private luxury car when ac rail travel is too costly. Some upper middle class (AC2), Middle class (ACIII) class are only option left with IR to extract maximum possible revenue from.
Response by IR –
Cirulation of the message in IRCTC website and printed tickets was to make the public mentally prepared to pay more for their railway tickets. After over 2 months of message circulation, IR responded by introducing the so called flexi pricing in 3 classes of highly patronized premium trains i.e. Rajdhani, Shatabdi & Duronto in SL and all ac classes except ac 1st class.
First 10% seats in “general quota” shall be sold at normal fare, next 11-20% at 110% base fare, 21-30% at 120% base fare, 31-40% at 130% base fare, 41-50% at 140% base fare And 51-100%+RAC+WL at 150% of base fare. For acIII max fare was capped at 140% & not 150%. It may be noted that the “general quota” is about 60% of total seats/berths in a train, about 30% are Tatkal/Premium Tatkal berths which are much costlier than the general tickets & 10% are VIP quota tickets.
Analysis of the Response – Probable intentions of IR
Justification given for the fare rise is, these are faster & high priority trains, hence command higher fare. This justification does not hold ground due to fact that the base fare of these trains is already 20% higher than the other superfast express trains. Other justification given was that last minute travelers shall be paying more as is done in airfares. This also does not hold ground as they are already treated with astronomical Tatkal/Premium Tatkal fares. The intention is clear, irrespective of actual economic value of these classes, maximum possible revenue should be collected, i.e. IR want to make profits to the tune of 50% from these classes! Which industry have such kind of profit margins?!!
This was intended to be a master stroke, as these trains are loosely classified dubbed as rich man’s trains. Actually maximum passengers in these trains belong to ACIII or ACC class, which are predominantly occupied by middle class & upper middle class people. Many Durontos have second class sleeper coaches also. This will bring rise in the second class sleeper tickets in a small way and response of public will help decide the extension of the flexi pricing in this class also.
In other words IR intends to compel the middle/ lower middle class to pay much higher flexi-fares for comparatively undervalued services offered and compensate for the losses incurred in carrying poor at ridiculously low fare. While the rich ones remain mostly unaffected as they enjoy travel in ACI (untouched by flexifare scheme) or air and they shall pay commensurate to the services availed. They are always in a position to pay a little more and avail a further value added service, rather than getting arm twisted to pay more for inferior service.
Future Possibilities about IR fares
Based on the passenger response, the policy is likely to be introduced in phases like (1) Garib rath, Fully ac expresses, (2) Superfast Expresses –ac classes (3) Expresses- ac class (4) All expresses- SL class
As of now, govt. has not touched the non ac classes ordinary ones in which poor are supposed to travel. Even in upgraded Mahamana Express, 15% fare increase in all classes was announced for the better facilities provided, but increment in the second general class was withdrawn at the last moment. This is an indication the second class unreserved/ordinary fares are not going to be increased in near future. But now and then the ridiculously low second class fare is highlighted by RMs and officials by comparing it with the price of other essential commodities and it is likely to continue. This is an strong indication that this Mr. Prabhu will break “the jinx” created by Mr. Lalu, and a substantial correction in ordinary second class fare is imminent, most probably after UP elections.
If flexi fares are implemented in all express trains, there will be golden opportunity for the Bus/Taxi/ airline operators
Opportunities before Road lines operators
There will be golden opportunity for the Bus/Taxi operators (especially luxury bus) to deploy bigger, better & state-of-the-art buses on Indian Roads.
– Huge augmentation done to Express Way/Highway network in last 2 decades
– Huge investment in Roads projects being embarked upon by the current govt.
– Huge traditional ac class clientele of railways (ones paying surge fares) will now be looking for reasonably priced comfortable alternatives like ac bus/taxi.
The surge fares will play a major role in breaking the mental block existing amongst the traditional ac rail travelers of avoiding road journeys for medium and long distance travel. The economies of scale shall enable them to provide cheaper and better services thereby further denting into IR share. They may try to entice the ac rly passengers by offering pickup/ drop down at main road near the residence of travelers. This will benefit travelers by a few hundred Rs. and a time of about 1 hr. or so. This factor could be a game changer for them.
Opportunities before Airline operators
New aviation policy of the Govt envisage a quantum jump in the national air traffic of by starting the hitherto unused 300 air strips mostly in mid-sized cities, by developing them into no frill low cost airport. More over airfare for up to 1 hour air journeys involving one non-metro destination is capped at a maximum of Rs 2500 only. Surge fare of IR shall bridge the price gap between ac rail travel and air travel. Passengers of ac classes shall have a much higher valued airline option at either slightly less or same or slightly more prices. Again the resulting economies of scale shall help airline operators to operate bigger aircrafts with lesser fare thereby further attracting more ac class passengers of IR.
Opportunities for passengers
Although people shall be forced to pay more for surge fares in IR for a period of time say 5-10 years, and by that time the airline & bus operators will get opportunity to encash the situation and expand their business. The passengers shall then have more credible options (air/ road/ rail) for their medium and long distance travel. So much depends on how the competitors i.e. airline/ bus/ taxi operators respond to the full scale flexi fare policy of I.Rlys.
In the process, the nation shall be at loss as inherent efficiency of railways, which is most energy efficient, cost effective, environmental friendly and high capacity mode of transport, shall not be effectively utilized for the betterment of nation. Monopolistic and old fashioned working of IR will hurt the Indian economy. Hence, this is opportune time to introduce an element of competition in Railway sector by carefully bringing in pvt. Sector.
TechNote 