A pertinent question on the introduction of flexi-fare introduced by Indian Railways (IR) is why it increases passenger fare covertly instead of reducing its expenditure. After taking over as railway minister in November 2014, given his chartered accountancy background, Suresh Prabhu's philosophy has been to choose the tough path of mopping up non-fare revenues and reduce the operating expenses, thereby putting pressure on IR officials to innovate to fill the gap between operating revenues and expenses, rather than taking the easy path of increasing passenger and freight fares.
As a sequel, the Non-Fare Revenue Directorate was established in the Ministry of Railways in April 2016 and a host of measures such as advertisement at railway stations, in coaches and all along the tracks; commercial farming alongside railway tracks and pay-and- name-a-train option have been identified to increase non-fare revenue. Given IR's legacy of not looking beyond conventional operational revenues, several of these measures would take some more years to fructify.
On the expenditure side, there are two major components for IR. The first one is salaries and pension, the second one fuel. With the implementation of the Seventh Pay Commission, salaries and pension would become 37 per cent and 23 per cent of the total expenditure from 30 per cent and 20 per cent, respectively. The average monthly gross salary paid to an IR employee, according to the Seventh Pay Commission is about Rs 64,000 in 2016-17. This is almost on a par with the monthly gross salary of an entry-level Class I officer. The monthly gross salary paid to the lowest level IR employee or, for that matter, a government employee at the time of entry into service is about Rs 23,000, which is on a par with the average salary paid to an engineering graduate in the corporate sector at the entry level. With the implementation of the Seventh Pay Commission, the additional outgo for salaries and pension for IR is about Rs 20,600 crore.
Unlike other departments of government, IR has to earn its revenues from passenger and freight services. Unlike the corporate sector, IR has almost no scope of "rightsizing" its human resources when the share of expenditure on human resources increases beyond an acceptable limit. Moreover, it becomes unsustainable for IR to pay such a high salary to about 1.32 million employees over a long period of time from revenues from its operations alone. The pension burden would haunt IR for at least the next three decades.
Fuel expenses constituted 18 per cent of IR's total expenses in 2014-15. Since 2014, IR did extremely well in reducing fuel expenses. About 50 per cent of passenger traffic and about 70 per cent of freight traffic are hauled by electricity in IR. It achieved a major breakthrough in the last two years by getting the approval of the Central Electricity Authority to buy electricity directly from private players instead of State Electricity Boards, which trimmed expenses on electricity by about 40 per cent for IR. Moreover, by adopting energy-efficiency measures aggressively in the last few years, IR's electricity consumption for non-traction purposes remains stagnant. In the case of diesel, IR plans to import crude oil directly and use some of the refining capacity of state-run oil refining companies, thereby cutting expenses on diesel by at least 15 per cent. Some may tout it as tax arbitrage, but the fact remains that the measure would pare oil expenses for IR by a few thousand rupees.
Apart from these questions, there are two larger implications to the success of flexi-fare system in "elite" trains to passengers. If the flexi-fare system achieves both policy success and financial viability, the message that would emerge from passengers is that they are ready to pay up to 50 per cent more for rail travel. IR could then extend the flexi-fare system to all mail/express trains. However, the first year after elections is the best period for implementing such unpopular decisions and it is left to the government to make such a bold decision.
It is known that cross-subsidy creates economic distortion. In fact, subsidy on passenger traffic has shrunk the share of rail to 12 per cent now from about 70 per cent in 1950. How? With no break-even on passenger services, each additional train, unless it is an "elite", "premium", "Suvidha" train or the impending "Humsafar" train, would incur loss for the IR exchequer. With no financial support to compensate for the subsidy from other ministries, especially the finance ministry, IR has to earn by other means not only for its expenses but also for the subsidy that it provides to passenger transport. As the subsidy bill reached Rs 30,000 crore in 2016-17, decreasing operating expenditure and generating non-fare revenues would not alone bridge the gap completely between operating revenue and expenses.
IR's rail expansion projects, whether it is the doubling of tracks, new routes or electrification, have focused on routes that carry substantial freight traffic. Routes that connect coal mines to power plants, iron ore mines to steel plants or any other route that augments freight traffic get priority over other routes as these pass the test of financial viability. Routes with huge passenger traffic potential have been relegated as these don't pass the test of financial viability. Only when IR is able to mop up revenues that break even with the expenditure for passenger services would passenger-dominant routes become financially viable for infrastructure augmentation and the declining share of rail in passenger traffic would get reversed.
IR has a 2020 vision to provide reservation tickets to all passengers, who want to travel by train. For this to happen, cross-subsidisation of passenger travel has to end sooner than later. Flexi-fare for "elite" trains is the right move in this direction.
The author is a doctorate in public systems from IIM Ahmedabad and currently teaches at TAPMI, Manipal. The views are personal
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