Marginal Cost Pricing by

Indian Railway

MBA RM
2015-17

Submitted to-

Dr. Ramakrushna Panigrahi

Prepared byGroup 9
Bittu Samanta (UR15052)
Rohit Kumar Swain (UR15067)
ShilpaMariya George (UR15077)
Shobhan Kumar Meher ur15078 (UR15078)
SidhantNayak (UR15080)
Sumith S. (UR15085)

Marginal Cost Pricing by Indian Railways

Introduction: What is Marginal Costing?
Marginal costing is a technique for expense bookkeeping and choice making utilized for interior
reporting as a part of which just peripheral expenses are charged to cost units and altered expenses
are dealt with as a bump whole. It is otherwise called immediate, variable, and commitment costing.
Peripheral evaluating is in light of the presumption that since settled and variable expenses are
passed on by the present yield level, the expense of delivering any additional unit (minimal yield)
will include just of variable expenses of extra work and material expended.
Subsequently, the contention goes, any sum by which the offering cost surpasses the variable
expenses acquired by the peripheral yield will be immaculate benefit. Be that as it may, over the
long haul, this is a ruinous presumption on the grounds that the company's rivals will be forced to
cut down their expenses as well. Additionally, the customers will request these low expenses as the
standard while the firm, to survive, will even now need to guarantee its total income surpasses its
total costs. In peripheral costing, simply variable expenses are utilized to decide. It doesn't consider
altered expenses, which are thought to be associated with the time periods in which they were
caused. Minimal expenses include:
1.
2.
3.
4.

The expenses really expended when you make an item

The incremental increment in expenses when you increase generation
The expenses that vanish when you close down a creation line
The expenses that vanish when you close down a whole backup

In this procedure, cost information is given variable expenses and altered expenses indicated
independently with the end goal of administrative choice making. Negligible costing is not a system
for costing like procedure costing or employment costing. It is essentially an approach to investigate
cost information for the direction of administration, Rather, more often than not with the end goal of
comprehension the impact of benefit changes because of the volume of yield.
The immediate costing idea is to a great degree valuable for transient choices, on the other hand,
can prompt destructive results if used for long haul choice making, since it does exclude all
expenses that may apply to a more extended term choice. Besides, negligible costing does not
conform to outer reporting measures.
Basic Use Cases for Marginal Costing
Marginal costing can be an important gadget for surveying a couple sorts of choices. Here are likely
the most generally perceived situations where negligible costing can give the most advantage:
Automation investments: Marginal costing is helpful to decide the amount of a firm stands to pick
up or lose via computerizing some capacity. The key expenses to look into are the incremental work
expense of any representatives who will be ended versus the new expenses brought about from
hardware buy and resulting support.
Expense reporting: Marginal costing is exceptionally valuable for controlling variable expenses, in
light of the fact that you can make a change investigation report that contrasts the genuine variable
expense with what the variable.

Client benefit: Marginal costing can help figure out which clients merit keeping and which merit
disposing of.
Inner stock reporting: Since a firm must incorporate backhanded expenses in its stock in outside
reports, and these can set aside quite a while to finish, minimal costing is valuable for interior stock
reporting.
Benefit volume relationship: Marginal costing is important for plotting changes in benefit levels
as deals volumes change. It is generally easy to make a minor costing table that brings up the
volume levels at which extra peripheral expenses will be brought about, so administration can
assess the measure of benefit at diverse levels of corporate movement.
Outsourcing: Marginal costing is helpful for choosing whether to produce a thing in-house or keep
up a capacity in-house, or whether to outsource it.
Points of interest and Benefits of Marginal Costing
Expense control: Marginal costing makes it less demanding to focus and control expenses of
creation. By keeping away from the discretionary designation of settled overhead expenses,
administration can focus on accomplishing and keeping up a uniform and steady minimal expense.
Straightforwardness: Marginal costing is easy to comprehend and work and it can be consolidated
with different types of costing (e.g. budgetary costing and standard costing) without much trouble.
Disposal of expense difference per unit: Since settled overheads are not charged to the expense of
generation in minimal costing, units have a standard expense.
Fleeting benefit arranging: Marginal costing can help in transient benefit arranging and is
effectively shown with make back the initial investment diagrams and benefit charts. Near
productivity can be effortlessly surveyed and conveyed to the notification of the administration for
choice making.
Exact overhead recuperation rate: This technique for costing disposes of vast adjusts left in
overhead control accounts, which makes it less demanding to discover a precise overhead
recuperation rate.
Most extreme come back to the business: With peripheral costing, the impacts of option deals or
generation strategies are all the more promptly refreshing and surveyed, guaranteeing that the
choices taken will yield the greatest come back to the business.
Drawbacks and Limitations of Marginal Costing
Grouping expenses: It is exceptionally hard to discrete all expenses into settled and variable
expenses plainly, since all expenses are variable over the long haul. Subsequently such
characterization now and again may give misdirecting results. Besides, in a firm with a wide range
of sorts of items, minor costing can demonstrate less valuable.
Precisely speaking to benefits: Since the end stock comprises just of variable expenses and
overlooks altered expenses (which could be significant), this gives a bended picture of benefits to
shareholders.

Semi-variable expenses: Semi-variable expenses are either rejected or mistakenly broke down,
prompting twists.
Recovery of overheads: With marginal costing, there is often the problem of under or overrecovery of overheads, since variable costs are apportioned on an estimated basis and not on actual
value.
External reporting: Marginal costing cannot be used in external reports, which must have a
complete view of all indirect and overhead costs.
Increasing costs: Since it is based on historical data, marginal costing can give an inaccurate
picture in the presence of increasing costs or increasing production.
Marginal Costing Can Be Helpful for Short-Term Decision Making
Marginal costing is a useful analysis tool which usually helps management make choice and
understand the answer to specific questions about revenue.
That said, it is not a costing methodology for creating financial statements. In fact, accounting
standards explicitly exclude marginal costing from financial statement reporting. Therefore, it does
not fill the role of a standard costing, job costing, or process costing system, all of which contribute
actual changes in the accounting records.
Still, it can be used to discover relevant information from a variety of sources and aggregate it to
help management with a number of tactical choices. It is most helpful in the short-term, and least
useful in the long-term, especially where a firm needs to generate adequate benefit to pay for a lot
of overhead.
Furthermore, direct costing can also cause problems in circumstances where incremental expenses
may change significantly, or where indirect costs have a bearing on the decision.
INDIAN RAILWAYS
The pretended by the Indian Railways in our nation's socio-political advancement is undeniable.
Aside from its expressed obligation of transporting men and merchandise over the length and
expansiveness of the nation, it has assumed a stellar part in times of common and man-made
catastrophes. The part of the railroads turns out to be much more significant to the advancement of
the nation as we enter the 21st century and the pace of the development of the economy quickens.
The requirement for a productive transportation division would turn out to be more pivotal with
each passing year. Along these lines it is fundamental for the Railways to stay aggressive, regarding
both expense and nature of administrations, to guarantee a proficiently working transport area in the
nation.
As is clear railroads frame some piece of the fundamental framework of the nation. Extensively all
foundation administrations can be partitioned into the accompanying two classes
1) Open Access Services : These administrations are those from which individuals can't be
effectively avoided, regardless of whether they have contributed financially to the foundation and
support of the administration or not. A few cases of this administration incorporate open lighting,
intra city streets and so on.

2) Limited Access Services : These administrations are those which can be given solely on a client
pays premise and the individuals who don't pay can be avoided from getting a charge out of the
advantages of this administration. These administrations in this way can act naturally financing.
Railways in a perfect world will fall in the last category, as it will not be too burdensome
assignment, making it impossible to counteract some person who has not paid for the administration
from taking the advantages of it. In India the railways now symbolize an institution which is there
to satisfy a social need and in addition a business one and on a regular this has prompted approach
mutilations far from the most financially solid ones. One by result of this impression of the
railroads has been the arrangement of cross-sponsorship of lower class travelers, which is the
classification with the most slender edges, by cargo administrations and higher class travelers, who
give the heftiest edges. This has prompted a serious money related smash in the Indian Railways
and as result the railways has neglected to pay a profit to the legislature without precedent for a long
time. Further its capacity to put resources into offices needed for modernizing the railways has
additionally endured a body blow
according to the liberalization arrangements of the Narasimha Rao government the railroads
confronted more difficulties. As the nation coordinated with the worldwide economy all costs in the
economy needed to adjust themselves to those appealing in the global markets. Along these lines as
costs of transport administrations fell worldwide the normal insurance that the residential segment,
including the railways, delighted in turned into good days gone by. In the meantime it faced
expanding levels of competiton from different wellsprings of transport from inside of the economy
a) Post deregulation of the trucking business the roadways have caught an immense piece of the
railroad of the overall industry. This has been fulfilled with expanded client introduction,
adaptability and lower expenses for short separation courses.
b) The improvement of freeways and six path parkways have just prompted the level of competition
being offered by the road segment expanding all. With the declaration of the 'Brilliant Quadrilateral'
venture the opposition to the railways can just increased.
c) Petroleum things once a fortress of the railroads, has been progressively moving towards
investigating pipelines as the most appropriate method of transport.
d) Coastal Shipping and Inland Waterways have proceeding taken away piece of the pie from the
railways, with the Government giving dynamic support as far as good strategy choices. Items like
concrete and coal have progressively begun using these as the most used method of transportation.
With a course length of 62,462 Km, running track stretching out to 79,188 Km of which about
22,000 Km, are energized, 7202 trains, 3,527 Electric Multiple Unit Coaches, 36,000 routine
mentors 3,15,000 wagons and lifting 400 million tons of cargo, 3800 million travelers for each year,
and utilizing 1,63 million staff, Indian Railways is the biggest railways system on the planet. Its
administration vests with the Railway Board consisting of 6 individuals and a Chairman, the
previous working as Ex-officio Secretaries to Government of India and the recent as Ex-officio
Principal Secretary to Government of India. They have added to national combination and have
advanced the improvement of in reverse ranges by powerful opening up of characteristic assets in
distinctive areas of the nation. Clearly, such a major and complex framework will call for
monstrous assets for its operation. Its to gross income surpasses Rs. I8, 000 crores and expenses
surpass Rs. 16,500 crores for every year. Indian Railways are the main examples in the realm of

procuring benefits, specially in the course of the last 6-8 years on regular basis. It's evaluating and
funds are, in this way, of vital noteworthiness.

1.Structure of Railway Budget

Railways have their own separate budget from the Budget of the Government of India into which all
earnings are credited and from which all expenditure are met by them. On the receipts side, in
addition to the revenues generated by them, they show the budgetary support given by the
Government of India. Due to insufficient or budgetary resources, the railway are also allowed by
the Government to raise loans from the market through Indian Railway Finance Corporation (IRFC)
which is known to as the non-budgetary support by the Government'.
These are taken to credit on the receipt side and the corresponding interest and loan repayment is
presented on the expenditure side. They also set aside a substantial amount for the Depreciation
Reserve Fund, and transfer certain funds to the Revenue Reserve Fund, Development Fund, Pension
Fund, Accident Compensation Safety and Passenger Amenities Fund. All of these are shown in
their budget. The railways can easily draw on these funds except the Depreciation Reserve Fund in
which case withdrawals are subject to be approved by the Government as the Central Government
takes the Balance in the Fund as a pan of the national kitty.
All the railways payments on the capital-at-charge are debited to the expenditure account. In the
year of losses railway may defer payment of dividend obligations. In reality, therefore dividend is
taken as of the nature of interest.

The railway follows a system of full distributed costs in arriving at the unit costs of their all major
activities. The costing system goes through severe limitations. Railway user payments are not

rationally link to costs. The predicament of the users, as shown such as that fare and freight charges
are high and that they are being hiked too often without improvements in the quality of service is
explained by not relating the user payments to costs.
Clarifications behind the troublesome resources position of railways are various. The most basic is
that they are looked upon as open utility organizations regardless of the way that the game plan as
per the Indian Railway Act is one of rail lines to limit as business endeavors. In view of this
overwhelmed interpretation, populist measures are taken after for occasion charging the railroad
customers much underneath cost in appreciation of explorers, specialists and certain items like
sustenance grains, salt, sugarcane, food, manures, natural items, vegetables, etc.
Thus, the disasters realized on this record and from the operation of uneconomic lines are mounting.
The evaluating course of action in a split second took after is suggested to be regulated by the
principles of cost of organization and the estimation of organization with cross sponsorship of
hardship making organizations from the surplus on load action.
The weight for resources for financing Five Year Plans of the Government of India and the need to
give less costly railroad transport to progressing speedier improvement has provoked either creating
of overpowering mishaps or delivering fringe surpluses that are unreasonably deficient, making it
difficult to back rail course headway. There is a reluctance to spend attractive aggregates on
genuine upkeep of the railroad assets in light of the benefit crunch.
It might be seen that railroad organizations are sold to individuals when all is said in done and along
these lines railways can utilize client slant or choice to draw in the stores expected to deal with the
customers request. By excellence of control on confirmations, salary raised from rail customer
charges were found lacking for enthusiasm for railways. On the other hand railways were starving
of budgetary sponsorship for theory. Under the New Economic methodology, the railways told that,
if they raise more inside resources, they can have a greater Investment Plan. With this, the accent is
more on the right assessing of the railroad organizations for finishing powerful resource part and
perfect headway of rail line transport as a middle base industry.
2. Evaluating Considerations
An evaluating system serves the twofold limit of
(a) appropriating a given sum or strike course servicers in order to serve the best need of the best
number and
(b) supplying the appropriate measure of railroad organizations and conveying than in the an
extensive part of way. Its application to railways is rendered troublesome in light of the way that
railways, not in any way like some distinctive organizations, have largo fundamental costs (joint
cost) which are difficult to scatter amongst different things or organizations in any plan of
evaluating. Consequently, noteworthy alteration is relied upon to suit the perceiving traits like that
of joint costs and also the unmistakable parts which the Government would like the railways to look
for after.

Certain characteristics of railways are of unfathomable essentialness to their esteeming.

i) Sunkenness of cost.
At the point when a railroad is fabricated it can have no other usage however to give rail transport
along its course. It can't be secured and excess point of confinement in any one piece can't be made
available at some other place or time. Henceforth, unutilised farthest point has no alternative
utilization in the short run and its monetary matters quality is zero.
ii) Lumpiness of endeavor
A base endeavor central before the point of interest can be utilized by any stretch of the creative
ability. Likewise, theories take after a stage limit. They can be made just in a certain quantum. A
valid example, paying little respect to the way that a huge bit of a train is obliged, one full loco of a
given cutoff must be secured.
iii) Cremation of high farthest point early
In light of long time required for creation restrict, the breaking point must be made before hobby.
Thusly, if interest fails to show up or does not develop to the degree expected, it would provoke
unmoving breaking point. Railroad wanders, thusly, run the threat of unmoving utmost.
iv) Joint Cost and the bye-thing nature of railroad organizations
On the same railroad track, particular sorts of trains are run and in the railroad workshops
heterogeneous things are made for usage in assets like the rails, guides, wagons, prepares et cetera.
This makes division of costs to unmistakable things incredibly troublesome.
v: Decreasing cost with longer division completely dry dynamic squares of yield
The railways offer with other broad framework tries, budgetary parts of scale. This is the system for
thinking behind telescopic rates.
vi) Continuity or capital stock
The railroad framework, it may be said, can never be completely supplanted. To deal with
additional interest it is only essential to add to or change the present capital stock. The track, if truly
kept up, can be a tried and true asset. This makes connected inconveniences for describing costs.
As an unfathomable attempt of the Government, if railways are obliged to limit like business
undertaking they have to fit in with budgetary and business duties as are ordinary to each and every
business enterpris. A quality methodology which is fitting for railways must he chose in the
association of the going with standards;
Pricing of railroad organizations should be, for instance, to yield a net give back that contrasts
with the lack estimation of capital in the economy;
The quality charger for the railroad office must have a snug relationship to the costs of giving it;
and
Monopoly assessing is to be kept up a vital separation from as it is thought to be against open
leisure act.

Indian Railway Act 1989 courses of action with Fixation of Rates.

Section30(1)
The Central Government may from time to time,by general or exceptional solicitation fix, for the
carriage of explorers and items, rates for the whole or any bit of the railroad. Differing rates may be
modified for unmistakable classes of stock, and show in such demand the conditions subject to
which such rates may apply
Section30(2).
The Central Government may by a like solicitation, modify the rates of whatever different charges
circumstantial to or connected with such carriage, including demurrage and wharfage, for the whole
or any bit of the railroad, and focus in the solicitation the conditions, subject to which such rates
ought to apply.
3, Full Cost Pricing
Under full cost assessing total costs or the railways should be detached among all customers. Where
the costs fluctuate beginning with One railroad then onto the following, portion should on an
essential level be related to individual rail courses: regardless, for all intents and purposes, they are
related to costs of the rail course structure when all is said in done.
Full cost assessing works through the typical cost charging framework as a singular or a two-area
demand. Under both the schedules, customers are subjected to uniform rates; yet the two-segment
obligation incorporates an adjusted and a variable toll while the two fragments are blended into one
under the single part require.
If there is to be no was wastage of advantages, the assessing standard should breaking point
excursions or action regarded at not precisely the costs and stimulate voyages regarded at more than
the costs they cause. This suggests that under equalization esteem should comparable costs
including that of wear and tear, and obstructing costs. Typical cost assessing prompts inefficient
resource part as it disregards the upgrading standard. A valid example, customers of uncongested
railways would get swindled and those of congested courses undercharged, realizing plenitude
demand on congested courses which can't be by SRMC esteeming. The second reason must be
played down altogether by virtue of a country like India where the upkeep of points of interest
neglect to inspire anybody.
LRMC fuses all costs, settled furthermore variable. There are inconveniences of choosing the
LRMC by virtue of railways in light of their characteristics discussed some time recently. As a
strategy for getting away from these inconveniences, the framework for treating capital utilization
in a given year as a present thing was suggested and grasped by the U.K. Transport Ministry. lf this
is recognized, LRMC evaluating means a worth proportionate to capital costs in any given year
notwithstanding the variable costs in that year, per unit of yield. This can't be recognized since it
conflicts particularly with the considered capital enthusiasm for any try figured on a substitution
preface clearly go into insignificant cost and any attempt to set expenses on such a reason is
opposite with fringe cost esteeming. It may in like manner be seen that when in concordance,
SRMC and LRMC, are proportional and a while later there need be no reduction in yield

Two imperative issues ascend out of these two esteeming regulations

1. Loss of yield under ordinary cost assessing,
2. Ascent of deficiencies under fringe cost assessing which has results for endeavor stores dry
transport of compensation.
As the condition 'Worth makes back the initial investment with Marginal Cost' ensures perfect output, it is battled that the deficiency must be secured by assignments if the capital stock is to be
energized and such a system is attractive over the choice of setting the expense satisfactorily high to
recover its costs. For, this would put society on a lower of satisfaction than if the railroad
workplaces were esteemed at fringe cost and adversities secured through gift. The challenges to
fringe cost assessing are without a doubt caught on. We simply demonstrate to them here for
satisfaction.
The challenges are:
1. Benefit will be missing to meet the costs and there will defenselessness about inadequacies being
secured.
2. The consequent transport of points of interest will be instead of enquiry thought.
3. A couple costs are constrained on outcasts and the people who bear these costs will no doubt be
not able to assemble the points of interest. Basically a couple points of interest may be introduced
on outcasts who can't be made to contribute towards meeting the cost.
4. It is difficult to perceive the costs of differing organizations and where whimsies gets in the need
of an organization, some sort of immaterial costing esteeming may get the opportunity to be critical.
5. Insignificant costs are not charged in the straggling leftovers of the economy or battling
organizations like the road. In this way, utilization of immaterial costing rule in railways alone is
certain to provoke bendings in task of advantages.
6. It is hard to say whether railroad organizations are made under decreasing, developing steady
costs.
4. Choice or Price Policy
Before keeping on examining whether typical or Marginal cost esteeming is appealing for Indian
Railways, we should note that the choice must be critical to goals of methodology and institutional
framework to which it applies. Particular sorts of esteeming lead to samples of benefit utilization. A
worth course of action that is seen as suitable for a surrendered target finishes being tasteless when
goals of methodology difference. All things considered, esteeming considerations imperative to the
Indian commonplace portion and in converse extents won't related to the urban and made part.
The purposes of Indian money related system can be put into the going with general orders:
1. Advance perfect theory and higher improvement of the economy.
2. Finish updates in quality and benefit through engaging contention.
3. Urge tolls to handle the leveling of portions issues.

4. Plan resources for financing change extraordinarily the middle divisions like agriculture, nation
headway, wellbeing, power and other crucial structure.
5. Joining of Indian economy with the overall markets.
6. Wipe out all obstructions to free segment and inflow of capital by deregulation and privatization.
On a fundamental level, these focuses require not conflict with evaluating methodology on
railways. In any case, all the time railroad expenses are associated with them. It justifies taking a
gander at the above destinations the railways in fairly more detail. In case the esteeming
methodology is not honest to goodness, railways won't have enough internal resources and with
potential results of getting budgetary sponsorship be propelling "Nil" and the private hypothesis not
imminent, lacking hobbies in rail lines would genuinely impact the improvement of the economy.
To be perfectly honest, capital enthusiasm for railways depends on the openness of grams from
general society exchequer to meet the deficiency between endeavor obliged and what can be met
from inside resources.
As the railroad transport expense shapes an exceptional part of aggregate offering so as to assemble
expenses,to attempt achieving larger exports by offering lower freight charges is uncertain to
generate better performance in exports. Experience uncovers that the railroad cargo structure which
incorporates motivators for mass things like iron metal, has not prompted a great part of the sought
results. A superior edge ought to be found in creating quality items in aggressive costs or utilizing
iron metal as a part of the nation itself for fare of made iron and steel of high caliber.
More resource mobilisation is constrained by expanding arrangement consumption and absence of a
return on investment in public sector projects. Since, asset crunch is defying all divisions estimating
arrangement of the railroads ought to go for creating more surpluses without yielding the quality of
service. Marginal surpluses or negative surpluses and reliance on budgetary support intensify the
nation's income and financial shortfalls bringing about solid inflationary weights.
Competition is important when the principles of the the game obtained all round. In a flawed
business sector framework, railroads alone receiving the negligible expense evaluating can't
guarantee enhancements in quality of service or its productivity. Despite what might be expected,
with deficiencies glaring in the eyes even marginal investment required for quality change and
higher profitability come elusive.
Globalization concentrates on faster industrialisation exploiting universal division of work. This
can't be the exclusive concern of the railways alone. While effective railway transport can just add
to auspicious developments of merchandise and individuals, it can can seldom achieve integration
all by itself. It is far-fetched that the Indian Railways can play any major direct part in this matter.
The last target of free entry/inflow of remote capital is a non-valuing issues. Financial controls and
authorizing should be removed for foreign capital to come to areas open to it. Administered prices
scare away new participants and additionally capital. While railways are still subject to some sort of
regulated cost or the other, no special advantage can be guaranteed.
In favor of privatization, the massive or lumpy investments with long development periods appear
to be far beyond the reach of the private sector. More than this, just exercises which are profoundly
gainful can draw in capital, either domestic or international. This likewise falls into none-price
phenomena. It should be further mentioned that a choice to throw open productive fragments of the

Indian Railways for cooperation by private capital does not naturally bring into the nation surplus
capital somewhere else.
1. Optimum Allocation and Growth
The assumption behind marginal cost pricing that all good are sold at marginal cost and all
components get their marginal item all through the economy in the greater part of the nations is
because of charges, imposing business model states of some degree or other. At the point when this
is so charging marginal cost for the railway administration would prompt it's over use and the
estimation of the peripheral component utilized in the railways will be less than its quality in other
area. Thus, national wage can be expanded by assets out of the railroad area.

This proposes the possibility of second best arrangements. The attractive quality and insight or
altering costs and/or expenses of open ventures to shadow costs in developing countries are not too
clear.
Price is not by any means the only purpose behind the movement of activity from rail to road. The
strategy of railways namely, inclination to long separation rake load traffic over the short separation
and the small traffic is partly responsible. Yet another reason is the low quality of administration
and the lack of door to door delivery. Indeed, even bulk traffic is conveyed by road not higher costs
maybe because of guaranteed time delivery, no pilferage, and spot delivery. To the degree that the
railways may wish to regain traffic lost to roads,the price may have to move towards the marginal
cost rather than the average cost in which case railways would bring about huge deficits. Regardless
of the possibility that marginal cost estimating is received to boost demand, in reality resources of
that order are not accessible for the railways to add to their network to adapt to the increased
demand.
2. Charging Principle in Competing Services
It is important that at least the roads, the main competitor to railways should he observing the
marginal cost rule, if the same is to be adopted railways. Otherwise, maximum benefits cannot be
achieved and problems of transport co-ordination will be encountered.

Since Indian Railways charge a price which is less than the marginal cost for some commodities
and higher on some others, more of the former traffic is attracted to railways, consequently the
major contributing factor for railways deficits does not shift. On the contrary, it has a tendency to
increase, leading to an increase in deficit. The same reason also leads to over utilisation in certain
routes and its capacity in some others.
When marginal pricing is not followed by the competitor like roads, asking the railways to adopt
marginal cost pricing is common. The road users in India pay more than the total cost of road
provision. Thus when cost plus pricing prevails in the road sector, adoption of marginal cost pricing
in roads amounts to transition from higher cost pricing to marginal cost pricing whereas in respect
of railways, It is one of movement from below marginal cost and average cost plus pricing towards
marginal cost pricing.
If price is made equal to marginal cost in both the railways and roads, there would no doubt be an
efficient allocation between railways and roads, but there would be over utilisation of transport
services in relation to other sectors of the economy where average cost plus pricing tends to prevail.
Thus, adopting MC pricing in both the sectors is impracticable, politically and financially
unacceptable.
An approximation to average cost pricing for both roads and railways seems to be feasible. The rise
in price of railways from below marginal cost to average cost will help eliminate deficits. It should
be reiterated that any particular form of pricing cannot be advocated for railways ignoring what
prevails in the competing modes of transport.
3. Resource Mobilisation: International Surpluses
There can be several reasons for building up intentional surplus in the Railway Budget.
Firstly, Railways are to pay the dividend or 7% on the Capital-at-charge which is given
to them as a loan in perpetuity.
Secondly, in the new Economic Policy, railways are required to function more as a
commercial enterprise in which case the dependence on the general budget for both revenue and
development needs is either reduced or eliminated. Particularly in the budget of the Railways of
1996-97, the budgetary support is only Rs.1269 crores or 15.6%. The balance 84.4% of the total
will have to be generated by the railways from their internal resources. In fact, the future
development of the railway modernisation and providing adequate and efficient railway transport
depends upon the size of the surplus. In the event of losses, railways will be compelled to reduce
their development but also to seek loans from the Government for meeting the losses.
Thirdly, transport cost in manufacturing form s a negligible proportion except in case of
a low value commodity like coal or bulk commodity like iron and steel, cement etc. The transport
cost as such is spread over a very large output catering to the consumers throughout the length and
breadth of the country. Where there are experts making use of the railway transport, the incidence
of freight falls on the foreign consumers. Therefore, generating surplus poses no threat of
stimulating inflationary pressure in the country.
Fourthly, the contribution to the general budget made by the railway earnings will
finance the development ire other sectors. In this way, benefits of overall growth come back to the

Railways in the form of increased demand for railway transport. Thus, there will be a feedback and
the surplus is a payment for the amounts that accrue to the railway users from development.
Finally, the direct relationship between payment by users and benefits of travel received
by them renders, unlike taxes which are not quick payments, railway fares and freights a payment
for service. Surplus may have repercussions on the demand as well as on tolerance of the general
public especially the commuters. But in so far as the benefit is conferred, payment covering the cost
of the services need not be less attractive.
However, it needs to be mentioned that transport is in a large measure an intermediate good and a
very steep hike in fare and freight can have repercussions in the production of a wide range of
outputs. Reliance on railway user payments to create surplus should not be at the cost of diversion
of traffic and more distortions in the economy.
8.Redistributive Function
Income redistribution is not a direct objective of the New Economic Policy, which aims at a higher
growth rate. Reduction in income inequality is to be achieved indirectly through higher growth of
the Indian economy. Therefore, Railway pricing is not to be assessed from the view point of
achieving income redistribution.
The level of inequality and its changing pattern has raised some issues. The degree of concentration
of wealth and overall income inequality has somewhat increased in the urban sector. Distribution of
income in the rural sector is also becoming less equal. Again, distribution varies among different
occupational classes like salaried employees, self-employed and the owners of property. Available
data show that contractors among the self-employed have greatly improved their position and those
engaged in transport, manufacturing and financial policies are also fairly well off.
Changes in the method of railway pricing inevitably cause changes in the distribution of income.
The way in which pricing affects different sectors or occupational classes depends on the manner in
which earnings from the pricing system are used. In the present pricing system, there is a transfer of
income from freight customers to passenger customer.
In the case of industrialists and businessmen the incidence of higher pricing will not fall on them
because they may be shifted to the consumers of the goods produced or sold. In the case of
passengers and commuters whose travelling expenditure is not met either by their employers or
from sources other than their income (salary) the incidence will rest with them. While this may not
lead to any pressure on inflation, shifting of higher railway price in the case of freight can be
inflationary.
But it is difficult to say what actually the distribution effect in case of non-railway users is. In the
case of rising of freight on items like food-grains, fertilisers etc., the effect on distribution of
income will be marked in the case of poor farmers within the agricultural sector. As contractors and
those engaged in business and industry make use of railways to a greater extent than others, the fact
of railways getting higher revenue from the better-off sections may be a welcome effect. But one
cannot be sure that among the non-railway users, benefits have accrued to only those who are in the
low income groups.
Intentional surpluses are to be achieved in the railway budget not as a fleeting feature. The surplus
in the railway budget has two consequences: one is that investible funds become available to the

railway for investment. The other aspect is the relation of the surplus to the general budget. With a
reduction in the budgetary support to the railway, the overall budget deficit has been reduced. In
fact, in 1995-96, the budgetary deficit of Government of India was Rs 7,600 crores. The deficit
would have been more, by Rs. 1583 crores had the railways not paid the dividend (Rs 1583
Crores)on the capital-at-charge in that year. The point that is to be emphasized is that the influence
of the larger surplus on the general budget would be in the form of assisting the Government of
India in reducing both its revenue deficit and the fiscal deficit, and at the same time enable the
railways to maintain a rate of growth which can sustain a higher growth rate of the Indian economy.
Why should railway users be made to pay high charges for leaving a large surplus which will be
used to ease the deficits of the General Budget? It may not be used for financing any expenditure
from which they do not derive any additional traffic benefit. In so far as the surplus is earmarked for
the railway development providing coaching services in suburban passenger services in
metropolitan cities like Bombay, Calcutta and Chennai where they operate Electric multiple Unit
and Non-Electric Multiple Unit services.
9. Problems and issues
Indian Railways is deep in the red and reported a loss of 30,000 crores (300bn) in the traveler
section for the year closure March 2014. Working proportion, a key metric utilized by Indian
railroads to gage budgetary wellbeing, is 91.8% in the year 2014-15. Railroads convey a social
commitment of over 20,000 crores (200bn $3.5bn). The misfortune per traveler km expanded to
23 paise before the end of March 2014. Indian Railways is left with a surplus money of just 690
crores (6.9bn $115mn) before the end of March 2014.
It is evaluated that over 5 lakh crores (5 trillion) (about $85 bn at 2014 trade rates) is obliged to
finish the continuous ventures alone. The railroad is reliably losing piece of the pie to different
methods of transport both in cargo and travelers.
New railroad line ventures are frequently reported amid the Railway Budget every year without
securing extra financing for them. In the most recent 10 years, 99 New Line ventures worth
60,000 crore (600bn) were authorized out of which one and only venture is finished till date, and
four undertakings are as old as 30 years, however are still not finish for some reason.
One of the undeniable reasons of the decay of the piece of the pie of the railroads is the proportion
of its cargo admissions to its traveler passages, which is one of the most elevated on the planet.
Aside from the expense edge, the low quality of the administrations that the railroads give had
additionally prompted its losing piece of the overall industry to its rivals. Transport models in the
course of the most recent couple of decades have been driven by expense diminishment and
expanded rate of cargo development. This has prompted the advancement of a multi modular
arrangement of transport including containerization of cargo and intuitive coordination between
railroads, ports and roadways. In this manner, the disregard of containerization of cargo has
additionally prompted the railroads dropping out of numerous clients thought set.
Sanjay Dina Patil an individual from the Lok Sabha in 2014 said that extra tracks, stature of stages
are still an issue and ascend in tickets, products, month to month passes has made a disturbing
circumstance where the common man is troubled..

10. Restructure Railway Finance

It is interesting to know the practice which obtains in some of the countries like Great Britain,
Germany, France and Switzerland. In these countries, while the Railways have their own pricing
policy based on cost plus pricing, the Government gives subsidy to the Railways where their
services are priced at below cost.
Indian Railway finances should get restructured to suit the requirements of the commercial
enterprise. Taking the total financial scenario of our country, further continuance of indiscreet
subsidies and neglecting efficiency in financial management of railways can only lead to further
destabilizing and destroying one of the most successful public enterprises of the government of
India. The resource requirements of the Indian Railways are enormous and the restructuring of their
finances brooks no further delay.
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