Turnaround of Indian Railways

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Turn Around of Indian Railways
Micro Economics Assignment

Indian Railways3
Causes for decline in performance3
Diagnostics, Recommendations and Initiatives taken by Indian Railways4 Outcome5
Domain Analysis7
Passengers Domain7
Freight Domain7
Other Domains10
Parcel and Catering Services10
Monopoly of Indian Railways – A welfare maximization firm13 Revenue Maximization14
Price Discrimination15
First Level Price Discrimination15
Second Level Price Discrimination15
Third Level Price Discrimination15
Auctions Applied in IR16
Sealed first-price auction in Parcel Service:16
Reverse Auction in Catering Service:16


Railways is a rising industry not just in India but in many parts of the world. Railways went out of business in the West from the 1960s to 1990s due to its inability to respond to competition from road and air traffic systems. Since railways are large entities serving vast and expansive areas it is often believed that they are unable to adapt to changes in the environment. For decades the only news about rail systems was about their decline. This decline has been halted and reversed in many parts of the world. Railways are resurging based on new ideas (e.g. high speed trains), environmental friendliness, new customer oriented services and new attitudes all over the world.

Indian Railways

Indian Railways (IR) is the largest railway network in the world operating under a single management. It is often called the 'lifeline of India'. Indian Railways is the largest employer in the world, directly employing about 1.4 million people. It is also providing indirect employment to over seven million people.

One survey in the early-2000s revealed that one in every ten Indians depended on lndian Railways for his livelihood, directly or indirectly (Expert Group on Indian Railways, 2001). Fifteen million people across the country travel by Indian Railways everyday on average. IR operates as a department under the Government of India. It is the only department which presents its budget separately from the annual budget, presented by the Ministry of Finance.

In the late 90s IR found itself in a grave situation. A number of studies pointed towards the poor performance indicated by the declining revenues and shrinking market share as well as the declining capacity of the lR for financing its expansion and growth

Reports produced by Kundu (1995) and Expert Group on IR (2001), illustrated the inevitable plight of Indian Railways during the late 1990s. Following are some points highlighted in their reports:

• Indian Railways is today on the verge of a financial crisis • It is unlikely that Railways would resort to any major reduction in staff strength, given the strength of their labour unions. • The possibility of increasing the fares is very limited due to extreme sensitivity of the issue and the political repercussions • As far as freight traffic is concerned, it contributes a much smaller proportion to the total traffic revenue than say before 20 years • It is important that the increase in earnings from commodity movement should come not necessarily through increase in rates but through growth in traffic • The rates for several commodities are already quite high and with any further increase in these, Railways run the risk of losing the traffic to road transport • IR maintaining a high growth in traffic revenue, generating a large part of the investible resources internally and, thereby, saving IR from the debt trap, without hampering the growth in different sectors of the economy, would be difficult and challenging task. • To put it bluntly, the Business As Usual Low Growth will rapidly drive IR to fatal bankruptcy, and in sixteen years Govt. of India will be saddled with an additional financial liability of over Rs. 61,000 crores (US $ 15.06 billion). On a...
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