Niti Aayog, in its report Impact of 'Social Service Obligations' by Indian Railways, said that inefficiency in railways cost structure significantly contributes to the losses in passenger service business and hence tariff increase cannot be the only mechanism to address such social costs. It has to be necessarily complemented by cost optimization and non-fare box revenue enhancement strategies with varying levels for various classes.


Railways estimate indicate that financial impact of under recoveries due to lower tariff in non-suburban services is expected to be around Rs 28,000 crore, while a review indicates that this could more reasonably be around Rs 22,000 crore considering the competitive market dynamics in estimation.


The report, released on Wednesday, said that for AC classes, the average tariff levels are higher than equivalent fares for AC bus service. Hence, it is likely that losses in AC class are attributable to higher base cost structure of railways than to its fare structure. Railways would accordingly need to explore alternate cost optimization and expenditure control strategies to recover such losses.


For the year 2014-15, while railways passenger business incurred a net loss of about Rs 33,000 crores, its goods business made a profit of about Rs 44,500 crore.


“Effectively, IR (Indian Railways) ends up treating its goods business as a tool to more than make up for its passenger business losses to manage overall financial situation. This practice of “overcharging” goods customers is actually unhealthy for the net economy as higher goods tariffs are eventually passed on to common public in the form of higher electricity cost, higher cement, steel costs etc.


“This unfair practice also distorts the inter-modal share leading to customers preferring sub-optimal choice of modes such as roads. Therefore, looking at this matter in a holistic manner, it is suggested that measures to address social costs of passenger service business should necessarily be taken along with measures to rationalize goods tariff distortions.”


The report goes on to say that it can also be argued that Railway provides better services comparable to bus transportation for various classes. For example, AC and Sleeperclass in railways is generally considered better compared to the equivalent class in bus transport. For second class, train services are more or less comparable and possibly better for many cases than bus transport. Hence, in an ideal competitive environment, railways should be able to charge a commensurate premium in its tariffs reflecting service level differences.


Read the full report here