Finally some sense at the Railways ministry….

After nearly a decade, the railways have decided to take a price increase. In a country where long term inflation has hovered around 5% and in the last two years, around 7-8%, its surprising the Railways didn’t increase prices for so long. It’s politics of course, as usual. The Railways ministry has always been outside the hands of the ruling Congress….and most Railway ministers, who have come from the Congress’s partners, have belonged to backward states. They believe that increasing rail prices is almost satanic in nature. In the meanwhile, the Railways have gone from bad to worse, with accidents rising all the time and losses increasing in double digits annually.

Forget railways, the government should not be into any business at all. It should let the more efficient private sector run all businesses, including the Railways. It should play the role of a regulator, ensuring that there is a high degree of competition, and a level playing field for all. It should also ensure that rules are put in place to protect consumer interest. I have argued in the past that just like the airline sector has been, the railways sector should also be privatized.

This is not so difficult to understand really. The railways today have enormous assets. Tracks with a length exceeding some 1,15,000 kms. Thousands of rail terminals. Loads of rolling stock. All of this can be “rented” out to the private sector for financial returns. There must be competition too….so there must be many train companies that offer competitng services from one place to another. Just imagine if we could have a Jet train from Mumbai to Delhi or maybe a Reliance bullet train! The competition will ensure that service quality improves, and consumers get a better deal. Sure, private players will be profit oriented, they will charge higher ticket prices, but then better quality always comes at a slightly higher prices.

The government can in turn use the rentals it collects to offer subsidized services for the poor. So its not as if the poor will necessarily have to pay higher fares. The government can offer its “plain vanilla” services….but even here, the higher benchmarks set by the private players will force the government to improve its quality. Today, there are absolutely no quality benchmarks. Whatever the government provides is considered the benchmark. Its only when we go abroad do we understand how good trains can be. People complain, but there is simply no benchmark to measure the performance against.

The same thing happened in the airline space, when the government allowed private players to come. Private airlines pay for the infrastructure that belongs to the government, and offer competing services.  The government’s airline – Air India – is also in the game, but it has been struggling because it hasn’t been able to keep pace with rising standards. Competitive pressures are now forcing the airline to keep pace. As per recent reports, Air India has improved its market shares. Its service standards have also improved. But given the fact that the airline business is a service industry, and air travel is more an experience than merely a travel plan, any government sector company is bound to be at a disadvantage. The work culture in government organizations is such that the last priority for employees is customer service and satisfaction. For this reason, Air India is always going to struggle. And it would be the right thing for the government to eventually sell it off. This is however not true for railways, where for the poor, what matters more than the experience, is cheap travel. That is why the government will always have a role in the railways sector. That however does not prevent it from allowing private companies from launching their services.

The basic mistake the government makes is in bottling up price increases for years. This makes prices out-of-whack with reality, and skews demand patterns. Prices should rise at their normal pace; they pinch people less that way as no one would mind small price increases. Had we done this with diesel, we would never have faced the problem we are facing now. The NDA government was smart in this regard, freeing up diesel pricing when it was in power. The UPA went back to regressive price control. And these price controls are now coming back to bite it. The decision to increase diesel prices by Re 1 every month is a smart idea. No one will feel the pinch. Likewise, if railway pricing had also increased at a regular pace over the years, we would not have had such a big price increase as we have had to take today.

Hardly strange and surprising is that the BJP is opposing this price hike. The BJP opposes for the sake of opposing. Just like always, the party has offered no alternative idea. The BJP does not like it that the fiscal measures being taken by Chidambaram are restoring the country’s economy back to health. It has to somehow protest. Even when it has no alternative idea of its own. The Left and TMC are parties which don’t even understand modern economics. We cannot expect anything different from them.

The real truth is that the Hindi saying “der aaye drust aaye” is what comes to mind while thinking about the railway price hike. I hope the government has learnt its lessons and now corrects similar analomies that exist in other sectors. No one complains when prices rise a few % points every year. But when the rise is sudden, everyone complains. No one remembers that for so many years there were no increases. This is basic human nature. The sooner the government learns this, the better for all of us!