Monopoly in Indian Railways
MicroEconomics (MPE Batch 22)
Professor: Dr. Srinivas Sriramdas
By:
Nehalkumar Parate
Sparshita Padwal
Sunayana Sarma
Madhuri Umesh
ACKNOWLEDGEMENTS
I would like to express my gratitude to Dr. Srinivas Sriramdas for having given us the
opportunity to study the Monopoly structure in the Indian Market with Indian Railways as the
classic case of example.
I would also like to acknowledge the crucial role of my team members who have supported
and guided me in the tenure of this report. I have had the pleasure of listening to many ideas
and with the brainstorming sessions that we have had to understand the market from various
angles which has been broadened my thought process. I would like to applaud the
commitment of every team member towards the project.
EXECUTIVE SUMMARY
This report was commissioned to examine the monopolistic market created by Indian
Railways analysing few of its facts such as total length it covers, number of wagons, number
of people it transports annually, number of employees, number of states it provides service, a
SWOT analysis, its pricing strategies and
The research draws attention to the fact that Indian railways cover a total length of almost
64000 kms, owns almost 2.2 lakhs of wagons, 40,000 coaches, runs 14,000 trains daily. Apart
from the passenger service, they have a proper suburban rail system which caters to
commuters to cities such as Mumbai, Chennai, Kolkata, Delhi, Lucknow, Hyderabad,
Mumbai and Pune. The number if passenger carried in 2016-17 increased to 8116 million
compared 8107 million in 2015-16 thereby increasing their Passenger earning from 44283.26
to 46,280.46 crores. Apart from passenger services it provides production services. Its
strength lies in the better connectivity across the length and breadth of the country along with
more carrying capacity of goods at a cheaper price than any other mode of transportation. Its
passenger service has been making losses since its inception and are prone to accidents and
delays which is complemented by failing to match international facilities. It has an
opportunity to capture traffic by introducing block containers at passenger speeds. Along with
the strength, weakness and opportunities it also faces threats with introduction of double road
trailers.
Railways uses its monopolistic position to engage in Policy of price discrimination, and
follows three types: first degree where it extracts from each customer by adopting dynamic
pricing; second degree varies according to quantity sold; third pricing is based on location of
purchase, customer engagement etc. The price discrimination is enabled because of the
Money power as there is complete government control, and almost zero competition,
extensive railway layout and Non re-saleable products and services.
AUTHORS PROFILES
Name Nehalkumar Parate
Education B.E
Experience 8 Yrs
Company OLA (ANI Technologies)
Interests Reading, Music
Name Sunayana Sarma
Education B.E
Experience 4 Yrs
Company SDI Business Services India Pvt Ltd. (SDI Int)
Interests Dance, Music,Travelling
Name Sparshita.D.Padwal
Education B.Sc
Experience 3 Yrs
Company Xplusgo
Interests Theatrics, Travelling,Music
Name Madhuri Umesh
Education BBA
Experience 3 Yrs
Company KPMG
Interests Reading and Music
TABLE OF CONTENTS:
1. Introduction to Indian Railways
a. Passenger services
b. Production Services
c. Freight Services
2. Pricing Strategy of railways
3. Revenue Expenditure
4. Author’s view
a. SWOT Analysis
b. Decrease in Passenger Traffic
List of Graphs:
1. Demand Curve/ Marginal Cost (MC) and Marginal Revenue Curve
2. Operating Ratio Curve
List of Charts:
1. Revenue Chart
2. Passenger Traffic Chart
List of tables:
1. Pricing related example tables for all degrees of discrimination
Introduction to Indian Railways
Indian Railways (IR) is the state-owned railway company of India. It is one of the
largest and busiest rail networks in the world, transporting just over six billion passengers and
almost 750 million tonnes of freight annually. IR is the world’s largest commercial or utility
employer, with more than 1.6 million employees.
The railways traverse through the length and width of the country; the routes cover a
total length of 63,940 km (39,230 miles). As of 2005 IR owns a total of 216,717 wagons,
39,936 coaches and 7,339 locomotives and runs a total of 14,244 trains daily, including about
8,002 passenger trains.
Railways were first introduced to India in 1853. By 1947, the year of India’s
independence, there were forty-two rail systems. In 1951 the systems were nationalised as
one unit, becoming one of the largest networks in the world. Indian Railways operates both
long distance and suburban rail systems.The first commercial passenger train in India ran
between Bombay and Thane (places in western India) on April 16, 1853.The distance of 34
kilometers was covered in about 75 minutes.
Indian Railways primarily provide following services -
Passenger services
Indian Railways operates 8,702 passenger trains and transports around five billion
annually across twenty-seven states and three union territories(Delhi, Pondicherry and
Chandigarh). Sikkim is the only state not connected. The passenger division is the most
preferred form of long distance transport in most of the country. In South India and North-
East India however, buses are the preferred mode of transport for medium to long distance
transport.
A standard passenger train consists of eighteen coaches, but some popular trains can
have up to 24 coaches. Each coach has different accommodation class; the most popular
being the sleeper class. Up to nine of these type coaches are usually coupled. Air conditioned
coaches are also attached, and a standard train may have between three and five air-
conditioned coaches.
Suburban Rail
Many cities have their own dedicated suburban networks to cater to commuters.
Currently, suburban networks operate in Mumbai (Bombay), Chennai (Madras), Kolkata
(Calcutta), Delhi, Lucknow, Hyderabad and Pune. Hyderabad, Mumbai and Pune do not have
dedicated suburban tracks but share the tracks with long distance trains. New Delhi, Chennai
and Kolkata have their own metro networks, namely the New Delhi Metro, the Chennai
MRTS and the Kolkata metro, respectively.
Production Services
The Indian Railways manufactures a lot of its rolling stock and heavy engineering
components. This is largely due to historical reasons. As with most developing economies,
the main reason is import substitution of expensive technology related products. This was
relevant when the general state of the national engineering industry was immature.
Production Units, the manufacturing plants of the Indian Railways, are managed directly by
the ministry. The General Managers of the PUs report to the Railway Board. The Production
Units are -
● Diesel Locomotive Works, Varanasi
● Chittaranjan Locomotive Works, Chittaranjan
● Diesel-Loco Modernisation Works, Patiala
● Integral Coach Factory, Chennai
● Rail Coach Factory, Kapurthala
● Wheel & Axle Plant, Bangalore
● Rail Spring Karkhana, Gwalior
Freight Services:
Indian Railways makes 70% of its revenues and most of its profits from the freight
sector, and uses these profits to cross-subsidise the loss-making passenger sector.
IR carries a huge variety of goods ranging from mineral ores, agricultural produce,
petroleum, milk and vehicles. Ports and major urban areas have their own dedicated freight
lines and yards. Many important freight stops have dedicated platforms and independent
lines.Indian Railways also transports vehicles over long distances.
Trucks that carry goods to a particular location are hauled back by trains saving the
trucking company on unnecessary fuel expenses. Refrigerated vans are also available in many
areas. The “Green Van” is a special type used to transport fresh food and vegetables. Recently
Indian Railways introduced the special ‘Container Rajdhani’ or CONRAJ, for high priority
freight. The highest speed notched up for a freight train is 100Â km/h (62Â mph) for a
4,700Â metric tonne load.
Future Goals:
IR has a goal of becoming carbonless by 2030 a current action plan has proposed
100% electrification of the rail network, besides introducing renewable strategies. Indian
Railways’ scale of modernisation and transformation has been able to ramp up renewal of
tracks to 476 km every month. In the last 64 years, freight loading has increased by 1,344%,
while passenger travel in terms of kilometers has increased 1,642%. The total investments in
2013-14 for railway infrastructure was at Rs46,000 crore, while for 2018-19 it will be Rs1.4
trillion.
Pricing Strategy of railways:
The source power of the Indian railways can be attributed to the following factors:
- It is a capital intensive venture which can be understood from the fact the Indian
railways had a separate budget every year.
- Indian railways operate all over India and thus have sufficient operating domain to
achieve economies of scale which a new entrant cannot easily replace.
- Restricted to Government’s rules and regulations.
Price discrimination:Price discrimination exists when the sales of the identical goods or
services are transacted at different prices from the same provider. Indian railway enjoys some
part of the consumer surplus by employing the different methods of price discrimination. It
employs the tactic of market segmentation, and achieves this based on various factors like
age, gender, job type etc.The products or services of Indian railways are not resalable and
thereby restricts its discount customers to become resellers and benefit from arbitrage.
Types of price discrimination:
1. First degree price discrimination: Price varies by customer's willingness or ability to
pay. This type of discrimination aims to extract from each customer whatever he or
she is willing to pay and hence theoretically complete consumer surplus is available to
the producer. Indian railways are moving in the direction of Dynamic pricing where
the fares can increase upto 1.5 times the original fares based on the demand of the
seats. While the first 10 percent of the seats will be sold at the normal fare, the base
fare will increase by 10 per cent with every 10 percent of berths sold.
The fares for travel in 3AC coach of Mumbai Rajdhani Express from Delhi to
Mumbai can go up to Rs. 2,736 from Rs. 2,085 at present, if the highest surge rate
applies.
2. Second degree price discrimination: Price varies according to quantity sold. Usually
monopolist sets the block prices, under which prices are highest for first block of quantity
bought and it is reduced for each successive purchase by the same customer. Indian railways
employ second degree price discrimination as follows
a. Indian railways charge for every kilometer which is reduced as one travels longer and
longer. Thus a train ticket for the Rajdhani 1st AC between Bangalore to Delhi (Rs
3495) is lesser than the cost of two 1st AC tickets one from Bangalore to Nagpur (Rs
4215) and Nagpur to Delhi (Rs 4005). The price differences are much more than what
can be explained by cost, hence this is a case of second degree price discrimination.
3. Third degree price discrimination: Price usually varies by attributes such as location of
purchase, customer segment etc. Indian railways heavily employs third degree of price
discrimination in following ways.
a. Below is the table explaining the rates for customers of various age group travelling
from Bangalore to Delhi. It is to be noted that all these discounts kicks in when the
travel distance is more than minimum chargeable distance for the given class.
Train Child ( 5-12 years) Citizen(12-60 years) Senior Citizen
Rajdhani 1747.5 3495 1398 (40% for men) & 1747.5
(50% for women)
b. Indian Railways offers discount for different types of passengers and concessions
for students, teachers, physically handicapped etc. Below is a table with more details:
Passenger Category Percentage of Discount
1. Physically handicapped 75% in 2nd Class, 1st Class, 3AC, AC chair car
2. Patients 75% in 2nd Class, 1st Class, AC chair car
3. Senior Citizens 40% for men and 50% for women in all classes
4. Awardees 50% for men and 60% for women in all classes
5. War Widows 75% in 2nd and SL class
6. Students 50% in majority of the classes
7. Youths Max 50% based on the national integration camps
and for unemployed
8. Kisans 25% to 50% in various classes.
9. Artists and Sportsperson 50% to 75% in various classes
10. Medical Professionals 10% in all classes
11. Others (Camps, tours etc) 25% in all classes
12. Izzat MAT Rs. 25 to person whose monthly income not
exceeding Rs.1500 and journeys up to 100 kms.
1. Peak-load pricing: Practice of charging higher prices during peak periods when
capacity constraints cause marginal costs to be high. Indian railway employs this type of
discrimination by differential discounts in peak and off-peak seasons
2. Inter-temporal price discrimination: Practice of separating consumers with different
demand functions into different groups by charging different prices at different points in time.
Indian railway employs this type of discrimination through their Tatkal Seva. Below is the
table depicting the minimum and maximum charges based on distance as well.
Class of Minimum Tatkal Maximum Tatkal Charges Minimum Distance for
Travel Charges (in Rs.) (in Rs.) charge(in Km)
Reserve 10.00 15.00 100
Second
sitting (2S)
Sleeper 100.00 200.00 500
AC Chair 125.00 225.00 250
Car
AC 3 Tier 300.00 400.00 500
AC 2 Tier 400.00 500.00 500
Executive 400.00 500.00 250
Price setting for unregulated monopolies
In economics, a company is said to have monopoly power if it faces a downward sloping
demand curve (see supply and demand). This is in contrast to a price taker that faces a
horizontal demand curve. A price taker cannot choose the price that they sell at, since if they
set it above the equilibrium price, they will sell none, and if they set it below the equilibrium
price, they will have an infinite number of buyers (and be making less money than they could
if they sold at the equilibrium price). In contrast, a business with monopoly power can choose
the price they want to sell at. If they set it higher, they sell less. If they set it lower, they sell
more.
If a monopoly can only set one price, it will set it where marginal cost (MC) equals marginal
revenue (MR) as seen on the diagram on the right. This can be seen on a big supply and
demand diagram for many criticism of monopoly. This will be at the quantity QM; and at the
price Pm. This is above the competitive price of Pc and with a smaller quantity than the
competitive quantity of QC. The offensive monopoly gains is the shaded in area labeled profit
(note that this diagram looks only at the case where there is no fixed cost. If there were a
fixed cost, the average cost curve should be used instead).As long as the price elasticity of
demand (in absolute value) for most customers is less than one, it is very advantageous to
increase the price: the seller gets more money for less goods. With an increase of the price,
the price elasticity tends to rise, and in the optimum mentioned above, it will be above one
for most customers.
Revenue Expenditure:
The charts below indicate the flows into and out of the revenue expenditure:
Revenue budget - Where the rupee comes from?
Revenue budget - Where the rupee goes?
Over the last three years, the inter share of the various earnings components has been
almost at the levels depicted above.This indicates that there is a certain amount of
predictability as to where the revenue streams are originating from and policy makers tend
to focus on these for augmentation of revenues.
Operating Ratio:
The Operating Ratio represents the percentage of working expenses (including the expenses
not yet paid) to traffic earnings (including the earnings not yet realised). The operating ratio,
which was 96.02 per cent in 2001-02, improved to 92.34 per cent (by 3.68 per cent) in 2002-
03 for the Railways as a whole.
The operating ratio of Indian Railways during the last five years is shown in the following
chart:
Perfect Monopoly ???
Though, Indian Railways, adjudged as one of the largest employer in India, bear
characteristics of such a monopolistic character, it cannot be adjudged as purely public sector
monopoly.
Reasons :
1) The sector is populist in nature.
2) There are substitute to the system - Road transport, Air transport etc. The imbalanced
enhanced freight rates have pushed the service seekers to explore other alternate / substitute
services witnessed in the freight uptake by roads.
3) Presence of wide private vendors - Apart from the locomotive engine, bogies, the
constituents are brought in from third party private vendors, not to say - food caterers and
cleaning services.
However, the Railways suffer from key issues:
1) No price regulation - Imbalanced fare rates - passenger versus freight --> which at times
present it as highly populist in nature
2) No rational planning - Witnessed in announcement of trains in particular in the States from
where the Railway Minister comes. This is in contrast to the need to push in trains through
busy commercial routes.
3) Laxity - Displayed in inability to run government programs. The project on modernization
of Indian Railway platforms appear to be unrealistic.
4) Lack of Professionalism - With high service tracks, there is no answerability over late
arrival / departure of trains. Poor are inconvenienced a lot.
Private players should be allowed to run passenger and freight trains in competition with
Indian Railways. The rail regulator remit should be to ensuring fair and open access and
fixing access charges on the rail track. Tariffs can then be left to the market.
Yes, the Railways has to generate additional revenues to invest in capacity. But that cannot be
done by abusing monopoly in a manner that is unsustainable in the long term. India’s aviation
market is growing, particularly its low-cost segment.
The Railways would hand over passengers to airlines by pushing up upper-class rail fares
ever closer to what a flight would cost.
There is lack of futuristic approach and dedicated understanding of way ahead.
Professionally managing through independent regulator would help in making the attitude
more corporate.
As far as freight trains are concerned, there is sufficient intermodal competition to let Indian
Railways decide freight tariffs. In the case of passenger trains—and especially for long-
distance travel—one has to think of creating intramodal competition. And surely, there is no
harm in having Indian Railways compete with private train operators for freight business as
well.
Investors have generally been shy of investing in an industry where far too much is still being
done or controlled by government and the risk/return trade-off is not always favourable.
Private investors will enter the industry only if a level-playing field is guaranteed to them.
The structure of rail sector in India, as it exists today, certainly does not allow a level-playing
field. The Railway Board has the unique distinction of being the rule maker, operator and the
regulator, all wrapped into one.
To induce competition, one can study two broad models followed globally. :
1) The first one is vertical integration—followed by the US and Canada
In this model, the competitors do both—own the infrastructure as well as operate the trains.
There is, of course, sporadic coordination between different competitors like using each
other’s tracks for short distances. The regulator’s job is to ensure this happens at a fair price
and at arm’s length.
2) The other model is vertical separation—followed by the UK.
In this model, the infrastructure is separated from the operation of trains. In general, the rail
infrastructure is owned by a single entity since it has the characteristics of a natural
monopoly. But this opens up the upstream business—of operating trains—to competition.
The regulator ensures fair access to all participants.
There are two other variants which crop up because of the problems with the above two
models. The vertical integration model is poor in exploiting the economies of density. It also
wastes precious resources as it involves duplication of infrastructure on a large scale. With
high cost of capital and multiple competing demands over a small pie of resources, India
cannot afford this extravagance.
The rail sector is unsuited for competition in ownership of infrastructure and hence, will reap
fewer gains than such separation in electricity or telecom sector. The separation comes at a
cost which has to be justified by gains made. Three, a vertically separate system is a lot
tougher to regulate.
In case of India, it will mean Indian Railways owning the infrastructure and being the most
dominant player in the operation of trains. This makes the case for an independent regulator
even more vital for generating competition. Independent and fair regulation—and this will
also require a high degree of expertise—is the only guarantee for potential private entrants
against unfair distribution of high-cost infrastructure.
If India manages the issues around tariffs and creates market competition by building a robust
regulatory structure, the minister of railways will not have to be involved in getting Indian
Railways out of trouble in future
Author’s View :
In order to summarize our thoughts about the Indian railway system, we have used the SWOT
analysis model to evaluate where the railways stand and look for scope of improvement
which we would like to focus on to provide better services to the users.
1. Availability of abundant low cost land near country stations
provides possibility for development
2. Less damage of goods compared to other modes of transport
3. Better connectivity across the length and breadth of India
4. More carrying capacity of goods
5. Largest commercial employer with almost 1.5 million staff
6. It transports over six billion passengers and almost 750 million tons
of freight annually
Strengths 7. Approx 120,000 km of tracks and nearly 8000 stations
1. Passenger sector is loss making
2. Accidents and delays cause a dent to the image
Weaknesses 3. Facilities not comparable to international standards still
1.It can capture large chunk of container traffic by introducing block
container trains operating at passenger speeds
2.It’s 70% of revenue and most of its profits comes from freight sector
and there is a tremendous growth in emerging companies, hence has a
great future for freight sector
Opportunities 3.Operating ratio has been decreasing drastically in last 10 years
1.Increase in allowable gross weight of road vehicles
2.Possible introduction of double road trailers
Threats 3.High accident rates
Below is chart showing the statistics in the Indian railway from 2010 to 2017:
The graph depicts a decrease in the passenger traffic from 2013 due to an increase in the
ticket price. After a decade the railway ticket prices saw a hike in 2013 – the increase ranging
from 2 paise to 10 paise per kilometer depending on the class you travel. The steepest raise
was seen for sleeper class passengers where it costs up to 33% more for those travelling from
Delhi to Thiruvananthapuram. Similarly, AC 3 tier Rajdhani has hiked the base fare exclusive
of catering and reservation fee.
The next change was announced in 2015, by the new government for a hike in passenger
fares by 14.3% and freight charges by 6.5%. This decision was taken to improve the financial
discipline and economic health of the country. This hike precisely is an example for the
macro economics for higher transport of freight leads to higher prices for consumers.
Transformative recommendations for Indian Railways:
1) Charge the road more traveled:
Focus on non-core areas: Debroy feels that a lot of tasks carried out by the Indian Railways
are not at the core of the prime business of rail transportation. These activities include
running hospitals and schools, catering, real estate development, including housing,
construction and maintenance of infrastructure, manufacturing locomotives, coaches, wagons
and their parts, etc.
2) Decentralisation of power: To ensure proper decentralization, there is a need to delegate
enhanced powers, especially in respect of tenders connected with works, stores procurement,
service or even revenue-earning commercial tenders, to the DRMs.Finance must completely
be under the DRM; ADRMs should be an explicit part of the administrative chain; some
earnings by the Division should be retained at the level of the Division.
3) Encouraging private entry: Private entry into running both freight and passenger trains in
competition with Indian railways should be allowed and private participation in various
Railway infrastructure services and non-core activities like production and construction,
should be encouraged by the Ministry of Railways.
4) Independent regulator: Shift regulatory responsibility from the government to an
independent regulator as the private sector will only come in if there is fair and open access
to infrastructure. The independent regulator shall ensure fair and open access and set access
charges; establish tariffs in cases where there the market fails to discover a price; and
adjudicate disputes between the track-owning organization and train operators; and between
competitors.
5)Social costs & JVs to bear them: Constructing new suburban lines should be undertaken as
joint ventures with state governments, not otherwise, says Debroy. There are too many Zones
and Divisions and thus a rationalization exercise is required.
6) Electrify a majority of its lines , which will help replace diesel engines with electric ones
on major routes.
7) Tariff rationalisation: A regulator instead of Parliament should be fixing tariff and
fares.This move would help rationalise fares and insulate them from electoral considerations.
8) Making freight possible: There should be an increase in the freight basket from 10 to 40.
Reclaiming freight transport space in the delivery of automobiles is an important project .
Railways has many advantages in this area but still lags far behind when compared to road
transport. For instance, one rake can transport 300 cars in comparison to 20 via a container
truck. Despite being a lot cheaper, auto firms chose roads over railways because trains don’t
run on time.
References :
1. IRCTC website : https://www.irctc.co.in/nget/train-list
2. ttps://www.livemint.com/Politics/L6hrLPQAITOxxBwIhayBNP/Rail-passenger-
fares-hiked-by-142-freight-by-65.html
3. http://www.india.com/news/india/railway-fare-hike-ticket-prices-increases-from-
november-15-707353/
4. https://timesofindia.indiatimes.com/india/All-railway-fares-hiked-after-a-
decade/articleshow/17960809.cms
