About Indian Railways

Indian Railways (IR) is a national asset as a single transport network which connects
far flung areas of the country. It is one of the largest transportation and logistics
network of the world which runs 19,000 trains. It runs 12,000 trains to carry over 23
million passengers per day connecting about 8,000 stations spread across the subcontinent. It is equivalent to moving the entire population of Australia. It runs more
than 7,000 freight trains per day carrying about 3 million tonnes of freight every day.
Its network of 65,000 route kilometers is more than one and half times the
circumference of the earth. It has joined the select club of countries comprising
Chinese, Russian and United States Railways with an originating freight loading of
1008.09 million tonnes (i.e. one billion plus) in 2012-13.
Indian Railways is the biggest monopoly organization in India. The organization has
around 1.6 million employees, the largest employer in India. The Railway network
was started in 1853, to cater to the needs of the defence forces, which had to travel
all over India. The whole system is under the ministry of railways, also called the
Railway Board. The system is so big, that a separate budget is presented in the
parliament. It carries twenty one million passengers per day, out of which about
eleven million are on suburban system. For suburban traffic, especially in Mumbai,
rail traffic is the main lifeline, accounting for about eighty percent of the whole
suburban traffic.
Indian Railways are the major carrier for bulk goods like steel, cement, coal,
fertilizers etc. It carries more than nine hundred million tons of freight traffic per
year and can thus be seen that it is the lifeline for movement of bulk goods in the
country. With a budget of approximately one lac crore of rupees, it is a vast network
spread over more than sixty thousand km with an average wage bill of more than
four lacs per employee.
The whole system has been divided in sixteen zones, besides one zone for metro
Kolkata, each headed by a general manager for running of trains. Besides there are
eight more units each headed by a general manager to look after research,
electrification, construction, and manufacturing units for locomotives, passenger
coaches, wheels and axles etc. Besides this there are sixteen public sector
undertakings/ organizations to look after other work like construction, catering,
finance, and container services etc.
The Railways is a mixture of opposites. While it is supposed to be financially viable,
at the same time, the fares are kept low, so that the common man can freely travel
on the same. On the one hand, all principles of commercial working are applicable,

at the same time; the fares are being kept very low. A situation has arisen where the
bus fare is six to seven times more than the railway fare in passenger trains, over
the same distance.

Economics of Indian Railways

As of financial year 2014-15, Indian Railways has:

Total assets of Rs. 87646.99 Crores

Total revenue of Rs. 6940.17 Crores
Total expenses of Rs. 5025.99 Crores
Net profit of Rs. 758.29 Crores
Operating ratio of 0.92

Revenue sources:
The Indian Railways has two main functional sources of revenue, namely, passenger
services and freight operations. Passenger services contribute about 26% towards
the revenue, while freight services contribute 66%. Remaining earnings are achieved
through other areas. There have been new announcements by the Ministry of
Railways regarding increasing of non-tariff earnings through monetization of assets
and other sources such as advertising and catering.
Market Structure of Indian Railways:
The Indian Railways operates in a monopoly market structure, i.e., it has no
competitor, no substitute, and the entry of any other player has been restricted by
the government. The Indian Railways is the price setter in the railway sector;
however, the primary purpose of IR is not to make profit, but to cater to the
travelling & goods movement needs of the country. Indian Railways is capital
intensive in nature, and this can be cited from the fact that there is a separate
budget for railways every year. Also, it follows economies of scale as it is spread
vastly over the country and has resources to follow this. The following plot
represents the price setting in a typical monopoly:

Monopoly of Indian Railways

Indian railways hold monopoly in rail transport in India. Source of their market power
can be attributed to following factors

Capital Intensive venture, which can be understood from the fact that Indian
railways has a separate budget each year
Economies of scale, as Indian railways operate all over India and thus have
sufficient operating domain to achieve economies of scale which a new
entrant cannot easily replicate
Government rules and regulations

Indian railways has a position, which is not possible in perfectly competitive

markets, where it can charge different price to different group of consumers for an
identical product, even though the cost of each such saleable unit remains same.
Indian Railways is a monopolistic organization controlled by the central government.
Because of its being a ministry, it is not allowing any legislation to be passed, which
will give it any competition. Because of govt. control, the system remained
independent, and private sector was not allowed to participate in it. Efforts are now
being made to allow private sector in limited areas, but the overall progress is
negligible. One of the major reasons for the same is that it is highly capital intensive,
with a low profitability.
Since the earlier freight rates were much cheaper than the road freight, the
administration because of populist measures raised the freight rates to compensate
for the loss in passenger traffic, where the fares have been kept very low, to please
the masses. A situation has arisen, where the road traffic is giving tough

competition, which it was not supposed to do. On the other hand, the passenger
fares are so low, that the masses want to travel by train, resulting in overcrowding in
trains with its own safety implications. Since there is no competitor, the railway has
been dictating its own terms, thereby losing business.

Price Discrimination in Indian Railways

Peak Load Price Discrimination
Peak load price discrimination is a strategy followed by certain industries where
discount is offered when demand is less (off-season) and when premium is charged
when demand is at its peak. Indian Railways does not indulge in such price
discrimination in passenger services, however it follows this strategy in freight
charges as explained:
Empty Flow Freight Direction Scheme: Under this scheme, to ensure
better utilization of empty wagons, 30% discount in freight charges are
provided during off-peak season and 20% discount during peak season on
loading in reverse direction (empty flow).
Two Leg Freight Discount Scheme: Under this scheme, IR provides 20%
discount in off-peak season and 15% discount in peak season on both
directions of freight carriage if adequate loading in provided on both ways.

First Degree Price Discrimination

First Degree Price Discrimination: First degree price discrimination: In first degree
price discrimination, price varies by customer's ability or willingness to pay. This
type of discrimination is made to extract from each customer whatever he or she is
willing to pay and hence tentatively complete consumer surplus is available to the
producer. Currently, Indian railways do not engage in any kind of first degree price

discrimination. However, they might plan to do so in near future. Indian railways

may plan to have online auctions of the freight capacity. This will allow better
utilization of freight capacity and boost revenues.

Second Degree Price Discrimination

In second degree price discrimination, price of the product/service varies according
to the quantity demanded. Larger quantities are available at a lower unit price. This
is particularly widespread in sales to industrial customers, where bulk buyers enjoy
higher discounts.
Additionally to second degree price discrimination, sellers are not able to
differentiate between different types of consumers. Thus, the suppliers will provide
incentives for the consumers to differentiate themselves according to preference,
which is done by quantity "discounts", or non-linear pricing. This allows the supplier
to set different prices to the different groups and capture a larger portion of the total
market surplus.
Usually players in monopoly set the prices in blocks, under which prices are highest
for first block of quantity of product purchased and it is reduced for each successive
purchase by the same customer, block by block. In the context of Indian Railways,
the secondary price discrimination is explained as follows:
Indian railways charge for every kilometer which is reduced as one travels
longer, i.e, the longer you travel, the lesser you pay per unit of distance
traveled. This can be seen in the case that train ticket for the Shatabdis AC
Chair Car between Bhopal to Delhi (Rs 1140) is lesser than the cost of two
1stAC tickets one from Bhopal to Jhansi (Rs 585) and Jhansi to Delhi (Rs 790).
For providing the same seat on same day in the same train, the cost
differences are negligible. The price differences are much more than what can
be explained by cost, hence this is a case of second degree price
discrimination.

Bhopal to New Delhi

Shatabdi Express AC

1140

Bhopal to
Jhansi
585

Jhansi to New Delhi

790

Chair Car fares

Indian railway provides special passes called Indrail for foreign tourists and
NRIs holding valid passport. They can obtain reservations against these
Indrail passes from any reservation office of Indian Railways. Prices of a pass
reduce as the consumer increase the number of days of validity of the pass,
which simply means customer buys more subsequent days of validity at
reduced price.
Sample fares for 1st AC for different number of days are as follows:

day

1
day

2 day

4
day

7 day

15
day

21
day

30 day

Adult

26

43

70

110

135

185

198

248

Price/d
ay

52

43

35

27.5

19.2
8

12.3
3

9.42

8.27

Analyzing the above trend, it is clear that it is a case of second degree price
discrimination. The price does not vary basis cost, but on the usage/purchase of
service by the customer. The higher the quantity purchased, lower the price.

Third Degree Price Discrimination

In third degree of price discrimination, price usually differs by attributes such as
place of purchase, customer segment, customer type etc. Indian railways heavily
employs third degree of price discrimination in following ways:-

IR segment its customers by age, thereby segmenting them in different

groups. Children falling in the age group of 5-12 years are entitled for a
discount of 50% on the purchase price. Citizens equal to or older than 12

years and less than 60 years have to buy the ticket at purchase price. Male
citizens equal to or older than 60 years are entitled for a senior citizen
discount of 30% on the purchase price (concession code SRCTZN). Female
citizens equal to or older than 60 years are entitled for a senior citizen
discount of 50% on the purchase price (concession code SRCTNW). It is to
be brought to notice that all these discounts comes 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
(M, F)

Sampark
Kranti

1873

3560

2548, 1873

Rajdhani

2330

4555

3220, 2330

Karnataka
Express

1806

3427

2455, 1806

* All prices for 1ST AC from Bangalore to Delhi obtained

from http://www.indianrail.gov.in

Indian railways discounts the price of its tickets on the basis of type of
passengers. They offers certain concessions to some types of people. For
example, they offer different concessions to students, patients, sports person,
handicapped person,unemployed youth etc. These discounts are offered to
make the rail travel attractive for the targeted consumers, who may choose
other mode of transport.

Discount
Code

Description

Discount
Percent

SPORTN

Sports National Level

50%

STDNT

Student Concession

50%

TEACHR

Teacher

25%

TLSMIU

Thalassemia Patient

50%

KIDNEU

Kidney Patients

50%

YTH2SR

Unemployed Youth for Interview

100%

* All discount codes applicable for 1ST AC from Bangalore to Delhi

obtained fromhttp://www.indianrail.gov.in

Indian railway moreover charges a convenience charge, ranging from Rs 10 Rs 20 for all the tickets booked online, thereby discriminating on the location
of purchase of ticket. This charge commands extra premium charges from the
customers who are willing to pay a little extra in exchange of the convenience
from booking online from home or on the go, avoiding queues at railway
reservation centers.

Indian railways offers circular journey tickets specially for the customer
segment intending for sightseeing or pilgrimage trip. Circular Journey Tickets
provides the consumer the benefit of telescopic rates, which are
comparatively lower than regular point to point fare. They are issued for all
journeys beginning and completing at the same station and can be purchased
for all classes of travel.

For instance, the circular journey fare for a trip from New Delhi:Route

Circular
Journey Fare
(1st AC)

New Delhi - Kanpur Central Varanasi Puri

Howrah Patna Barauni Muzaffarpur
Raxual New Delhi (4410 Kms)

2458

Source: http://www.indianrail.gov.in/circular_Journey_Fares.html

Individual leg fare for the same route

Route

Train Name

Fare (3rd AC)

New Delhi Kanpur Central

Magadh Mail

564

Kanpur Central Varanasi

Shiv Ganga Exp

861

Varanasi Puri

Neelachal Exp

988

Puri Howrah

Puri Hwh Exp

631

Howrah Patna

Poorva Exp

705

Patna Barauni

Mahananda Exp

235

Barauni Muzaffarpur

Vaishali Exp

274

Muzaffarpur Raxual

Mithila Exp

387

Raxual New Delhi

Satyagraha Exp

897

Total fare

5542

Source: https://www.irctc.co.in

Indian railways had introduced 6% freight concession for tickets booked from
other states for stations in North Eastern states in the budget of 2008-2009. In
this case discrimination is made on the basis on the destination.

Inter Temporal Price Discrimination

In this type of pricing strategy, the consumers are segmented as per different
demand functions. Different prices are charged to consumers at the same time for
same product, basis the different needs. In the context of Indian Railways, this is
applied in case of Tatkal tickets. It is explained as follows:
Indian railway additionally levies Tatkal (emergency) charges on passengers
for booking on short notice. Tatkal charges have been fixed as a percentage of
fare at the rate of 10% of basic fare for second class and 30% of basic fare for
all other classes subject to minimum and maximum as given in the table
below:

Class of
Travel
Reserve
Second
sitting
(2S)
Sleeper
AC Chair
Car
AC 3 Tier
AC 2 Tier
Executive

Minimum Tatkal
Charges (in Rs.)

Maximum Tatkal
Charges
(in Rs.)

Minimum Distance
for charge(in Km)

10.00

15.00

100

100.00

200.00

500

125.00

225.00

250

300.00
400.00
400.00

400.00
500.00
500.00

500
500
250

This pricing scheme enables consumers to obtain tickets at short notice and helps
railways earn extra revenue.

Dynamic Pricing
Dynamic fare pricing has been introduced for premium trains which is getting
popular as the Railways have been able to guarantee a confirmed seat to the lastminute travellers as well check touts. Premium trains were launched during the fag
end of UPA regime by the then Railway Minister Malikarjun Kharge to accommodate
plans of last minute travellers. These trains come with dynamic fare pricing and
faster speed on some the busiest routes.
The Railway are slowly trying to extend the dynamic fare pricing strategy to more
special trains operated during the festive and peak seasons. This will be reflected
soon in the special trains to be operated from various places for the upcoming
Sabarimala season commencing November.
Salient Features of Premium Special Train on Dynamic Pricing are: Dynamic fare stands for the fare component which may be increased with the
subsequent bookings.
Advance Reservation Period (ARP) of this train will be a maximum of 15 days.

 Agents will not be allowed to book tickets in these trains.

Dynamic fare shall be charged for confirm as well as RAC passengers.
Waitlist Ticket Booking is not allowed in this train.
Upgradation option shall not be applicable in this train.
Modification is not allowed.
Only E-tickets will be permitted for booking. I-ticket Booking is not allowed in this
train.
E-ticket booking is allowed in General Quota only.
Tatkal/ Ladies/Other Quota tickets cannot be booked in this train.
No concession shall be applicable in this train.
Vacant berths left at the time of charting will be offered for current booking at
current booking counters of train originating stations.
Cancellation is not allowed. However, ticket can be cancelled only if the train is
cancelled.
Dynamic Fare along with Total fare will be displayed after filling Reservation form.
Users must ensure the Fare and Journey Details before proceeding for payment.

The trains were conceived since railways were witnessing untapped demand
wherein people were willing to pay higher sums for the assurance of confirmed seats
to certain destinations. The pricing is dynamic depending on the demand with the
tatkal fare as the base fare. However, there is a cap on the lowest and highest price
that needs to be paid while booking the tickets.
The Railways had operated around 400 special trains to combat the rush of Ayyappa
devotees last year and the dynamic fare pricing was adopted successfully.
But during the course of operation in last one year, it was observed that prices sky
rocketed with increase in demand and at times fare of 3AC was more than 2AC. The
ministry then has decided to do away with demand based pricing and brought
forward a slab system whereby fare will remain same for a particular number of
seats despite an increase in demand. This facility will available from July 1.

According to Railway Board Member (Traffic) Ajay Shukla, they are changing the
concept of premium trains and from now on they will be called Suvidha Express.
People can now book tickets from window instead of only online reservation system
available then.
During an analysis, the railway officials also observed that the occupancy was over
80 percent in only 50-55% of the routes while it was below 50% in the rest of the
routes. Railways has then decided to stop premium trains on non-occupancy routes.
Railways have also brought 50 percent of tatkal tickets in all trains under dynamic
pricing.
The findings of a recent survey showed that 97 per cent of the commuters in key
cities did not feel the pinch of the dynamic pricing. Thus it can be said that it has
been well received by commuters.