Indian Railways and Bad Economics

February 26, 2015 by Indro

Indian Parliament presents its Railway Budget today. The Railway Budget is presented before the main Finance Budget and is seen as an indicator of what to expect. The BSE SENSEX has fallen. The passenger fares have been left unchanged — the huge subsidy to continue — freight and the tax payers to keep taking the burden of cross subsidy. Basically, it is all about not being able to reduce the burden of subsidy in this huge sector. The market does not seem to like that, obviously.
India wishes to be a large market economy, yet it is surprising that the central ingredient of a large market — its huge population — is completely ignored. The Indian railways handles arguably the largest volume of passengers that stands well above a trillion passenger-kilometers per year, ahead of China. Yet the railway has to look for revenues from variety of sources. What is completely lost is that this is the market that in itself is supposed to generate the necessary revenue.
Forget the innovative ways of selling to this large volume of people and offering rights to private operators to conduct a variety of businesses. Just imagine how much advertisers would be willing to pay to obtain the attention of the millions of pairs of eyes (and ears). How much would a soap brand pay to be the only soap brand who gets to advertise in the entire Mumbai main station using neon and other attention gabbing ads? How much would Coca-Cola pay to be the only soft-drink company? How about using the trains – both inside and outside? How about letting ad agencies bid for the exclusive rights to a group of stations and/or a group of trains? How about designing an auction system to allot these rights in a manner that maximizes revenue?
You need expert economists and market designers to do that, but there are plenty of people designing markets for revenue and efficiency in all kinds of places. Yet the Indian Railway System has to depend on subsidy when money is all around it and all it has to do is grab it!!

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A blog about economics, politics and the random interests of forty-something professors

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