AC local ticker rates have been slashed. Economic argument for right type of price decrease is as follows. Prices are to be lowered when it is expected that it will lead to higher demand (since now prices are cheaper than earlier) which leads to considerable rise in revenue but not so much rise in costs. In economic jargon, demand should be elastic (so as it rises when prices are cut) while costs are increasing returns to scale (a lumpsum fixed cost up to certain level). Once we consider this, we can see why Railways lowered the prices of AC locals.
The intuition of price
reduction is understandable. Running an AC local costs certain fixed amount to
the railway unless air-conditioning inside the train is precisely adjusted as
per the number of passengers. (Though I am not sure whether that will have huge
implication on cost.) Adding few more extra passengers will not change the cost
much (some extra wear and tear is to be added to the cost, but that is not very
significant rise at daily level.) There are certain fixed number of AC local
train services. And currently, considerable capacity remains un-utilized. Railways
has reasoned that capacity is underutilized due to expensive prices. If lowered
fares lead to more than optimal or more than optimal (typical local train crowding)
occupancy, railways will receive considerable increase in revenue without much
rise in cost which will help railways trim the losses.
AC local train
can have two types of passengers: those shifting from non-AC to AC and those choosing
AC local train over travelling by the road. The later group is unlikely to
shift to local train for cheaper AC travel. The later group has either those
who use public bus transport for whom train route is not convenient or those
who use cars (owned or hired) who are unlikely to shift to trains. If they
would be shifting, then shifting would have been observed even before AC travel
become cheaper. Though AC travel so far offers less crowded traveling
experience, accessing the local train is not a very pleasant experience and
hence it is likely to be avoided by those who can afford to do so. (What is
called ‘inferior good’ in the jargon.) So, the demand for AC travel is mainly
from those who are currently travelling from non-AC trains.
There are two
type of passengers who use suburban services: commuters and occasional passengers.
Commuters have certain fixed consumption of train service, typically 10 or 12
times per week while passengers will take train is and when required. Commuters
are unlikely to travel more for reduction in prices. The increased consumption will
be from occasional passengers. What purchasing power the occasional passenger
has and can such demand be large enough will be the key determinants of the
response to changed prices. There is certainly a section among occasional
passengers which will pay AC premium. But large number of passengers use local
trains for the inexpensive and speedy service they offer.
Railway has not
lowered the AC season ticket prices when it has slashed the journey ticket
prices. That is the curious part. The decision makers seem to have reasoned
that since season ticket holders have fixed demand, lowering the prices of
their tickets will lower the revenue arising out of season tickets and thus be
counterproductive. This is true if one considers only existing AC local season
ticker holders. But there is an upgrading effect which can raise the revenue
from AC locals. The upgrading effect is one where those with (colonially named)
1st class season ticket shift to AC season ticket. It will lead to
increased revenue and increased use of AC trains and can reduce some crowding
from non-AC trains. Along with reduced season ticket prices for AC locals, AC local
prices for the journey ticket holders can be slashed to half during 11 AM to 5
PM from Monday to Saturday (as of now AC locals do not have many trips on
Sunday). Such pricing strategy allows railways to increase the occupancy while reducing
the losses and it does so in much surer way by using sturdy demand from season
ticket holders than through somewhat fickler channel of occasional passengers.
The main issue with AC trains is perhaps not
the pricing but the availability. AC train trips are too few and hence those who
would like to use it would have to be at station in a very specific time-window.
More trips from the AC local trains would help greater utilization, along with
better pricing. But more AC local trips means fewer non-AC local trips, which
hurts very large section of commuters. Also, AC ticket prices were perhaps decided
from a point of view of cost-recovery and not making profit. If such is the
case, the railway will be less likely to add AC train trips at lower prices and
is likely to use price reduction as a strategy to reduce losses on current
trips. But if AC train trips are as infrequent as they are now, the response is
likely to remain lukewarm even with incentive of price reduction.
Railway must
improve its suburban ticket pricing. Mumbai suburban passenger traffic accounted
for 30% for the passenger traffic on Indian railway in 2017. It is unlikely to
be very different now. But contribution to revenue from Mumbai suburban services
was 3% for the same period. This is puzzling. Economic logic dictates that prices
should be higher where demand is steady (insensitive to prices or inelastic). This
is precisely the case for all railway travel but more so for the suburban
passengers in MMR.
Nearly half of
the commuters in Thane district in MMR in 2011 uses local trains. The percentage
is likely to have gone up by 2022. (For many in MMR, 50% might seem like a
small number. It seems almost everyone travels by local train, especially to
those who commute by local trains. That is not the case. 25% of the workers
walk to their workplaces. These walkers are typically residents of informal,
low quality settlements aka slums.)
There is a
section among commuters, identified by their 1st class season
tickets, which is facing same ticket prices in 2022 as they were in 2014 but
their incomes likely to have doubled by now. (These are pay commission
beneficiary government ‘servants’ or well-paid private sector employees who are
likely to have received 9% raise on average.) This pricing-income disparity is
perhaps true for non-1st class commuters as well.
The disparity is
not lost on government. Hiking the suburban train fares was one of earliest
decisions taken by NDA-II government. In June 2014, within a month of being
elected, railway raised the suburban train fares. It was met with severe
backlash and much of the hike was rolled back in few days. No attempt to change
suburban fares have been made since then, politics blocking sensible and fare economic
decision making. It is unlikely that it will happen in these inflationary times
and period where governing will be more and more about being re-elected.
The price-cut on AC local train fares is a low-hanging fruit which is not likely to yield much. Nothing against it, but there are juicier and bigger fruits somewhat above, but to get them will require shaking the tree, and that is not a good politics it seems.