Turn Around of Indian Railways
Micro Economics Assignment

Contents
Railways 3
Indian Railways 3
Causes for decline in performance 3
Diagnostics, Recommendations and Initiatives taken by Indian Railways 4
Outcome 5
Domain Analysis 7
Passengers Domain 7
Freight Domain 7
Other Domains 10
Parcel and Catering Services 10
Monopoly of Indian Railways – A welfare maximization firm 13
Revenue Maximization 14
Freight 14
Passenger 14
Others 14
Price Discrimination 15
First Level Price Discrimination 15
Second Level Price Discrimination 15
Third Level Price Discrimination 15
Auctions Applied in IR 16
Sealed first-price auction in Parcel Service: 16
Reverse Auction in Catering Service: 16

Railways

Railways is a rising industry not just in India but in many parts of the world. Railways went out of business in the West from the 1960s to 1990s due to its inability to respond to competition from road and air traffic systems. Since railways are large entities serving vast and expansive areas it is often believed that they are unable to adapt to changes in the environment. For decades the only news about rail systems was about their decline. This decline has been halted and reversed in many parts of the world. Railways are resurging based on new ideas (e.g. high speed trains), environmental friendliness, new customer oriented services and new attitudes all over the world.

Indian Railways

Indian Railways (IR) is the largest railway network in the world operating under a single management. It is often called the 'lifeline of India'. Indian Railways is the largest employer in the world, directly employing about 1.4 million people. It is also providing indirect employment to over seven million people.

One survey in the early-2000s revealed that one in every ten Indians depended on lndian Railways for his livelihood, directly or indirectly (Expert Group on Indian Railways, 2001). Fifteen million people across the country travel by Indian Railways everyday on average. IR operates as a department under the Government of India. It is the only department which presents its budget separately from the annual budget, presented by the Ministry of Finance.

In the late 90s IR found itself in a grave situation. A number of studies pointed towards the poor performance indicated by the declining revenues and shrinking market share as well as the declining capacity of the lR for financing its expansion and growth

Reports produced by Kundu (1995) and Expert Group on IR (2001), illustrated the inevitable plight of Indian Railways during the late 1990s. Following are some points highlighted in their reports:

• Indian Railways is today on the verge of a financial crisis • It is unlikely that Railways would resort to any major reduction in staff strength, given the strength of their labour unions. • The possibility of increasing the fares is very limited due to extreme sensitivity of the issue and the political repercussions • As far as freight traffic is concerned, it contributes a much smaller proportion to the total traffic revenue than say before 20 years • It is important that the increase in earnings from commodity movement should come not necessarily through increase in rates but through growth in traffic • The rates for several commodities are already quite high and with any further increase in these, Railways run the risk of losing the traffic to road transport • IR maintaining a high growth in traffic revenue, generating a large part of the investible resources internally and, thereby, saving IR from the debt trap, without hampering the growth in different sectors of the economy, would be difficult and challenging task. • To put it bluntly, the Business As Usual Low Growth will rapidly drive IR to fatal bankruptcy, and in sixteen years Govt. of India will be saddled with an additional financial liability of over Rs. 61,000 crores (US $ 15.06 billion). On a pure operating level, IR is in a terminal debt trap.

Causes for decline in performance

There were external as well as internal causes for the declining performance of Indian Railways. Due to opening of the Indian economy following the economic liberalization, there was increasing pressure for reducing cost and improving quality. The budgetary support from the Central Government was dwindling and its financial situation did not allow higher budgetary support to the Ministry of Railways. Along with this the competition from road and air was increasing.

Diagnostics, Recommendations and Initiatives taken by Indian Railways

The continuous decline in performance seized the attention of the top leadership and the need for diagnosing the sickness was felt. This resulted into the constitution of Expert Group on Indian Railways, also known as Rakesh Mohan Committee which delivered its report in the year 2001. This Committee among other things also recommended certain operational strategies to be adopted by Indian Railways, which are reproduced below:

• Increased average goods train speeds: Reduction in speed differentials between freight and passenger trains will be the best and most economical strategy for expanding the freight haulage capacity of the system. • High speed, modem passenger services • Commodity-specific freight strategies • Introduction of new technology: Experts estimate that a gap of nearly 20 years now separates the technology in use in Indian Railways and that of advanced systems. Inadequate attention has been paid to R&D and technology investments in IR. Being one of the largest rail systems in the world, IR must have access to R&D facilities that can be counted among the best in the world. • Harnessing Information Technology for freight operations and • Increased capacity through advanced signalling and communication systems: Owing to the characteristics of freight and passenger movement in India, most of the potential traffic that will contribute to a high growth rate will move on the major trunk routes. Route-wise studies need to be undertaken and investment programmes drawn up on the basis of full analysis of costs and expected benefits.

Outcome

Various steps have been taken since 2001 Consequent to these actions, the performance of Indian Railways started showing an upward trend, as can be seen from the tables of growth in physical performance, Growth Rate in Total Revenue and Total Working Expense, Operating Cost and Net Revenue,.

Figure A: Physical Performance
[pic]
[pic] [pic]

[pic] [pic] [pic]

Domain Analysis

Passengers Domain

Passenger earnings in 2005-06 went up by Rs 1013 Cr. (7.2%) over 2004-05

Possible reasons for this growth in passenger’s domain are:

• Initiatives in running 24 coach trains, deploying additional coaches in well patronised trains and even running of additional trains. These initiatives were made possible by ensuring analysis of demand based on the passenger reservation system data and requiring the field level officers to respond to it by additional supply where possible.

• Reduction of one rupee was offered in the second class ordinary fare, 10% in ACII and 18% in ACI and increased the cancellation charges. About 27 per cent of all tickets sold are cancelled, while the older charges for cancellation were Rs 20 for second class and Rs 30 for AC class, the new charges are Rs 40 and Rs 60 respectively.

• More trains being made superfast with a reduction in time and thus imposing a superfast charge, booking tickets from an origin different from the place of reservation, separation of tickets if a through a journey involved more than one train or a break of journey – thus not offering the telescopic benefits (the last charge has since been withdrawn).

• The tatkal scheme, targeted at the ‘last minute’ passenger was extended first from one day to three days and then to five days. This offered a window of opportunity to increase earnings through differential pricing, based on the time of booking. Also the average seats allotted to tatkal quota was increased from 64 to 50% of total SL berths (Average 251 Tatkal SL Berths).

• Emphasis was laid on what has been called ‘touch and feel’ initiatives to improve the service quality for the passenger.

Consequent to the above initiatives, the growth in number of passengers had increased to 13.45% in 2006-07 over 2005-06 and 7.12% in 2005-06 over 2004-05. The growth in the earlier four years had ranged between 3.2 % - 6.47 % (Figure A).

Freight Domain

Indian Railways, until 2001, was in debt of about Rs 61,000 crore. But since 2004, the scenario has completely changed. This is mainly due to few changes that were implemented during Mr. Lalu Prasad Yadav’s tenure in the Indian Railways. Many were surprised by the successive landmarks set by the Indian Railways. In last four years, IR has turned in a cumulative cash surplus before dividend of Rs 68,778 crore ($13.9 billion). Out of this Rs 15,898 crore has been paid as dividend, Rs 39,215 crore has been invested in rail infrastructure and Rs 13,665 crore has been added to fund balances to reach Rs 20,483 cr. One of the changes that were implemented was to increase the freight (Cargo) transportation.

Freight Movement in India
Road: Railways: Airline: Water=61.2%: 38.6%: 0.022%: 0.2%

The transportation of the freight by the train is much more as compared to the modes of transportation after roadways as per the statistics shown above. Indian Railways makes 70% of its revenues and most of its profits from the freight sector, and uses these profits to cross-subsidise the loss-making passenger sector. Hence the freight carrying capacity was increased to 750 million tons of freight to gain more revenue.
The increase in the freight revenue can be traced to three factors
(i) increased axle load
(ii) Reduced wagon turnaround and
(iii) market oriented tariffs and schemes.
The first two managerial actions increased the IR’s capacity to move higher volume of goods while the third action — market oriented tariffs and schemes - helped raise the per unit revenue from freight.

Indian Railways carries a huge variety of goods ranging from mineral ores, agricultural produce, petroleum, milk and vehicles. IR also transports vehicles over long distances.

[pic]

The freight transportation demand has increased since independence. It can be seen as below.
[pic]

Trucks that carry goods to a particular location are hauled back by trains saving the trucking company on unnecessary fuel expenses. Refrigerated vans are also available in many areas. The “Green Van” is a special type used to transport fresh food and vegetables. Recently Indian Railways introduced the special ‘Container Rajdhani’ or CONRAJ, for high priority freight. Ports and major urban areas have their own dedicated freight lines and yards. Many important freight stops have dedicated platforms and independent lines.
In order to increase the revenue, Indian Revenue increased the total freight carrying capacity and also the tariff according to the good being carried. The basis of charging for the freight is according to the class of the freight and the location to which it is transported. The class of the freight can be calculated depending on the length, width, height and weight. According to the volume, the class of the freight is calculated.
Another main strategy that was adopted by the Indian Railways was to increase the rate on some of the commodity and reduce the rate on other commodity. This led to the reduction of the transportation of commodity which was rated more to be transported through train. It further led to the increase in the transportation of the other commodities that were rated low. This increased the range of the commodities being transported. This can be seen in the table below. [pic]

The tariff on the commodities that comprised of the major freight was increased as shown below. [pic]
[pic]

The increase in the cost of food grains was mainly because of introduction of more refrigerated parcel vans. In order to regain the investment cost and also to increase the revenue, Indian Railways had introduced the increase in the tariff of the freight.

Revenue Maximization

Revenue Maximization was mainly done by increasing the range and volume of the commodities that were transported. The tariff strategy in the 90s had not recognised the market reality, especially as a consequence of the liberalisation. Corrective strategies in terms of rationalisation of freight classes had begun from 2002-03, with a reduction from 59 classes to 32 in one year. These strategies had continued over the past two years, bringing down the number of classes to 18. More significantly, in the past two years, the approach to freight tariffs had recognised the market scenario and price elasticity of demand where in
(i) IR has a competitive advantage in the generally ‘low rated’ bulk raw materials and can afford higher rates and
(ii) IR faces tough competition in the generally ‘high rated’ finished goods and cannot afford higher rates
The net result has been an increase in volumes and revenues, and more importantly an increase in market share.
Relation of Marginal Revenue and Marginal Cost Indian Railways displays natural monopoly. Thus the extra unit of the product will be transported if the cost of transporting it is lesser than cost of the previous unit. Thus the marginal revenue is lesser than the marginal cost because of the reduction of the price of the extra unit as compared to the previous unit.

Price Discrimination

Price discrimination is mainly observed in the monopolist market. In Indian Railways, third degree price discrimination is followed. The goods to be transported are charged as per the location to which it is transported. More the distance to be travelled more is the price to be paid.

Other Domains

1) Parcel and Catering Services

The increase in other earnings of Rs 599 crores (24.2% over 2004-05) came through parcel, catering, advertising, dividends from the public sector units under the ministry etc (Exhibit 7). The increase of 24.2% in 2005-06 over 2004-05 followed a similar growth of 24.7% in 2004-05 over 2003-04.

(a) Parcel
A passenger train had 16 tons of capacity for carrying parcel. The IR had an annual parcel carrying capacity of around 35 mt, of which the utilization was 5 mt (14%) 2004-05. This generated revenue of about Rs 500 crore (Table A). The cost of haulage and parcel office staff was Rs 1800 crore. Thus, the parcel segment was making a loss of Rs 1300 crore per annum. After the initiatives taken, there was significant change in revenues of parcel segment.

• Leasing of rear SLR (sleeper compartments) of popular trains • Leasing of the vacant compartment of guard in the front luggage vans to courier services. • Short term lease for a period of one year and lower lease price for trains, where SLR is underutilized. • Round trip leasing • Computerisation of parcel traffic

[pic]

[MOR, Various Years-b; *MOR, 2007]

b) Catering

IR formulated a new catering policy in order to improve the standards of food being served in the trains and in the stationary units to generate more revenue. Previously, catering contracts were based on an application-based system. Often, an administrative extension was granted to the incumbent. The rates used were not commercially contested.
Under the new policy policy, the catering contracts were given through an annual Open Competitive Bidding system. Competitive bidding aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favouritism.
With the new policy, as an example, an annual catering contract for an important train like Howrah-Kalka mail was awarded for Rs 83.6 lakhs, when earlier it fetched Rs 5 lakhs. After open competitive bidding, earnings have increased from Rs 13 crore to over Rs 100 crore due to mobile catering. On stationary catering, due to the open competitive bidding, as an example, the license fee at Bandra and Nagpur went up from Rs 78,000 and Rs 32,000 to Rs 16 lakhs and Rs 34 lakhs respectively.

[pic]

2) Reduction in prices:
The fares of AC First Class and AC Second Class are more than the fare for general class by over 14 times and 7 times, respectively. This has blunted our competitiveness in air-conditioned classes, which was having an adverse effect on the occupancy of these classes. Hence, it was proposed to rationalize the passenger tariff structure as has been done for the freight tariff structure. In the new structure, the fares of AC First and AC Second Class will be 11.5 times and 6.5 times the Second Class fare, respectively.
With this, there will be a reduction of about 18% in the fares of AC-I and 10% in that of AC-II. Sustained rationalization measures over the next three years will sharpen the competitive edge of the Railways.

3) Reducing journey times:
The Railways decided to re-work the all-India timetable de-novo, that is, with Zero base in the current year. This work was proceeding on high priority and for this, computerized simulation techniques, as necessary, will be employed. As a result of the review conducted so far, it has been decided to convert more than 200 mail/express trains to super fast mail/express category by increasing their speeds. With the preparation of a new time table on zero bases, the journey time of a majority of the Shatabdis, Rajdhanis will reduce and certain Mail/Express trains was likely to decrease by up to four hours.

4) Increasing bogies:
Spare coaches made available by increased train speeds and better utilisation of rake links are being used for augmenting the number of coaches in popular passenger carrying trains. The number of coaches in about 190 popular passenger-carrying trains was being increased up to 23-24 coaches. With the augmentation of these trains by about 500 coaches waitlisted passengers can get confirmed reservation thereby enabling Railways to earn Rs. 200 cr additionally every year.

5) Strategy to shrink queues at booking counters:
More than 10,000 tickets are being issued everyday through the Internet. The facility of I-ticket and e-ticket has been made available on all mail and express trains. The charges leviable on issue of e-tickets have been reduced by Rs. 20 per ticket in higher classes and by Rs. 15 per ticket in sleeper class. Passengers can now buy I-ticket and e-ticket through Rail Travel Service Agents also. The extension of this facility will help reduce queues at PRS counters.

6) “Village-on-Wheels” – Tourist train for Common Man:
Indian Railways have been running trains for up to exists for common people particularly from small towns and villages. It was proposed to run tourist special trains of ordinary sleeper class coaches which will run to a pre-determined schedule. These trains will collect the tourists from a region and take them to important places of religious and historical importance at affordable cost. Apart from promoting tourism this will enable the common man to travel around the country easily.

7) Special Measures for Women commuters:
Deployment of Lady Ticket Checking Squads on some sections of zonal Railways has proved helpful in infusing a sense of security among the female passengers travelling by trains. Encouraged by the results of this experimental step taken by Indian Railways, we have decided to extend the deployment of such lady squads over all the zonal Railways wherever it was required.

Monopoly of Indian Railways – A welfare maximization firm

1. They are the single seller of the rail services in India
2. There are no close substitutes for the commodity/service it provides. Cross elasticity of demand is zero or very small and price elasticity is