Rajdhani fare hike is not surge pricing (but it is a needlessly complex way to make extra money)

Indian Railways has been under a big financial crunch over the last few years and it is only set to get worse as passenger revenues fell for the first time in three decades.

Railway ministers have traditionally resisted raising passenger fares, considering it to be politically damaging, but the current minister for railways, Suresh Prabhu, seems to have had a rethink.

Like his predecessors, Prabhu resisted the temptation of raising fares in his last budget, even though he admitted that the public sector entity is going through a considerably challenging time which could be one of its “toughest” periods ever.

On Wednesday, however, the ministry moved and raised fares for the premium "superfast" category of trains such as Rajdhani Express, Shatabdi Express and Duronto through what it called a “flexi-fare system”.

This flexible fare system essentially is going to raise ticket prices for passengers of these trains by a maximum of 50% and a minimum of 10% in all classes except Air Conditioned First Class and Executive Chair Car where the ticket prices will remain untouched, a move that has been criticised by some, questioning the rationale of leaving higher-fares untouched.

The rail ministry said in its press release that the fares will rise by 10% as every 10% of total berths available in a certain coach get sold.

“The base fares will increase by 10% with every 10% of berths sold subject to a prescribed ceiling limit as indicated in the table below. There will be no change in the existing fare for 1AC and EC class of travel.” 

For instance, a Rajdhani train travelling from Delhi to Mumbai usually has five AC two tier coaches which have about 82 seats in all and 11 AC three tier coaches with 322 seats, according to indianrailinfo.com, a website that curates information on trains.

With the new proposal, first 8 seats of AC two tier will be sold at the base price of Rs 2,369 while the next 8 will be sold at Rs 2,605 and the price will go on rising by 10% in blocks of every 8 tickets sold till it reaches Rs 3,553.

This is just the base fare, exclusive of charges and taxes. But what it means is that that those buying tickets after the first 40 tickets have been sold will have to shell out up to 1.5 times the original fare.

Not surge

While the newspapers reported the new fare rules as introduction of “surge-pricing” by the railways, it is not exactly the case since prices only move one way here – that is upwards – irrespective of the demand.

For instance, taxi-hailing apps like Ola and Uber use dynamic pricing of this kind to tackle increased demand by charging consumers extra, which provides an incentive to drivers to head to areas where demand is more, and as supply rises to meet demand, the prices begin to slide down towards the base price.

In this case, however, the supply of seats is limited and the railways is attempting to price them block-wise as more and more of them get sold. So even if demand increases or decreases, the prices only one way – up. The point to note is that even if the coach is only 51% full at the time of departure, the prices will still climb to 1.5 times the normal fare.

“Vacant berths left at the time of charting would be offered for current booking. Tickets under current booking shall be sold at the last price sold for that class,” the release further said.

Essentially, this implies more revenue for the Indian Railways which is trying to encash the passengers’ need to get a seat on the premium trains. While the transporter insists that it is on an experimental basis for the time being, it expects to mop up an additional Rs 500 crore from the move.

Money matters

“This is on experimental basis. Like any other move, this will be reviewed after three-four months,” said Mohammad Jamshed, a member of the railway board while speaking to the Indian Express. “We expect a mop-up of not more than Rs 500 crore from this hike.”

Assuming that trains run at full capacity, the railways stand to gain substantial profits from this move, according to an analysis by Scroll. The committee led by NITI Aayog member Bibek Debroy on restructuring railways quantified profits and losses from premium trains such as the Delhi-Mumbai Rajdhani and concluded that the train makes a profit of about Rs 3.14 lakhs on each trip.

Using this data, and assuming that costs remain the same – since railways is not adding any capacity – Scroll found that increased fares can raise profits on this route by up to a massive 70%.

If all tickets get sold out on just one Rajdhani train going from Delhi to Mumbai, the railways stands to make an extra Rs 1.52 lakh – a handsome 48.63% rise in profits while revenues are going to rise by a mere 7% – assuming the costs remain the same.

‘Open loot’

While passengers are already miffed at the move, according to a report in India Today which quoted a person calling it an "open loot", there is the bigger question of the railways abandoning its public welfare responsibility in pursuit of profit.

“For many decades, Indian Railways has carried the burden of both public and business expectations which has led to most of the problems it faces today,” NP Srivastav, former finance commissioner in Indian Railways told Scroll earlier this year. “It is torn between providing cheap travel to the general public and making money from serving businesses which is why there’s a conflict in deciding prices, trains, running schedule and many other things.”

While Srivastav wasn’t off the mark in his assessment of the dual expectations that the Indian Railways faces, it is true that passenger fares have been subsidised by expensive freight charges for a long time now and that is adding to the railways’ financial distress.

“Our train fares for goods are the steepest in the world while we lose money on passenger trains,” Former Railway Board Chairman Vivek Sahai told Scroll earlier this year. “You can’t have a healthy entity when freight, which makes up for two-thirds for railways’ earnings, is exorbitantly priced. Roads will take over sooner or later if this continues.”

Even as the customers and political parties protest against the move calling it an “anti-people” and an “illegal” move, the Railways insists that the move is on a trial basis.

The Congress party reacted strongly to the move but insisted on calling it surge pricing. “While the courts have quashed the entire surge pricing concept as arbitrary and excessively burdening the consumer in case of Uber and Ola cabs, Modi government seems to have borrowed this ‘illegal’ profiteering idea with a view to steal money from pockets of people of India,” the Congress Spokesperson Randeep Surjewala told reporters.

Railway Board member Mohammad Jamshed sought to bring in a comparison with the airfares, as quoted in the Indian Express. “The very low-priced air tickets that you see are earmarked for very few seats while the majority seats are sold at high prices as the journey date comes closer, Jamshed said. "Our prices remain far lower than that." But the comparison does not hold as airline prices fluctuate on the basis of demand rather than being solely based on capacity constraints.

Kapil Raizada, the co-founder of RailYatri.in, put this in perspective by pointing out the move would mean that "pricing is going to be super volatile, with the next person paying more than the previous ones," resulting in confusion and lack of clarity for consumers.

It seems to be a "complex way to increase fares" when "a simpler way would have been to go for a flat increase of say 25% across these trains," he said. "This would have spread (a slightly lesser) burden evenly across a greater number of travellers, without the added anxiety and tension of rushing to book early," Raizada said.

"It is typically seen that the first 10% of the tickets are booked by the tout community – especially in the peak rush season," Raizada added. "Will this encourage them to book early and increase their demand?"