Empowering railway tariff regulator vital
When the Cabinet meets later today to approve the formation of a Railway Tariff Authority, it is imperative it give the regulator adequate powers. Without this, there is little point creating a regulator since, no matter how good its recommendations, there is no guarantee successive Railway ministers will accept them unless they are mandatory. There is a fear that, given untrammelled powers, the regulator may demand a dramatic hike in the hugely subsidized passenger fares. That, however, is an unreasonable fear. Given that passenger fares are such a small share of the Railways total revenues, even a massive 50% hike in them will fetch the Railways just R15,000 crore or so—a small amount compared to what the railways need. By 2020, the Railways need around R14 lakh crore for capacity expansion of even the most basic kind.
The experience of other regulators also suggests a massive tariff hike in passenger fares is unlikely to happen. In the case of telecom, local calls used to be subsidised by long-distance telephony many years ago, but it was only over several years that this was lowered. Ditto for the electricity sectors where, even today, regulators continue to allow very large degrees of cross-subsidy for household and agriculture customers. Indeed, if the government wants to play really safe, it can put a ceiling to how much rationalisation will be allowed for the first few years. If the Railways are allowed to develop in the manner that sacked minister Dinesh Trivedi envisaged—with 30% of revenues to come from non-traffic segments like hotels and restaurants—the regulator’s task becomes that much easier. As in the case of airports, the regulator will keep these revenues in mind while fixing passenger and cargo revenues.
That passenger fares need to be raised, and freight rates reduced is obvious. Since freight rates are so high, the share of the railways in various forms of transport—according to the white paper presented by Mamata Banerjee when she was minister—has fallen from 89% in 1950 to under 30% by the end of the last decade. The steady upsurge in losses in passenger services has meant that the percentage of cross subsidisation of passenger services by freight earnings has gone up from 20% in 2004-05 to 32% in 2009-10. Put another way, the passenger fare-freight rate ratio is 0.3:1 in India versus 1.3:1 in China. Apart from making the subsidies unbearable, the loss in freight traffic makes the railways even more unviable—in FY12, when the economy grew 15% in nominal terms, freight traffic grew much slower. So while the rail tariff regulator is unlikely to raise passenger fares dramatically, it needs to check the worsening freight-passenger fare ratio and then start fixing it. Fixing fares using transparent techniques—where all stake holders are invited to be part of the process as happens in other sectors with regulators—will be the first step.