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Privatization of Indian Railways



The Ministry of Railways has announced that it would be moving towards the privatization of 109 railway routes. The Indian railways are the world's fourth-largest network. The government plans an Rs. 30,000 Crore investment from the private sector. 

According to the ministry, the objective of this is to modernize the railway, reduce traveling time, create jobs, and enhance safety along with better experience. The department also stated that the private trains would be equivalent or faster than the already existing trains on the same route. 

The private sector will also be responsible for the maintenance and operating of these costs and will have to pay haulage and energy charges to the Indian Railways, and the driver and guard will be from the Indian Railways.

The Indian Railways has been a burden on the government due to its losses. The affordable prices of the railways, limit the revenue generated by the government, and privatizing the railway could help ease this burden. The investment from the private sector could act as an injection in the economy and help expand the economy. The reduction in commuting time will increase the productivity of workers and lead to an increase in the potential GDP. 

The Indian Railways is known for its lack of punctuality, while the trains are also slower compared to those in most developed countries. The trains provide an affordable means of communication to most Indians, and privatizing this may mean providing a better experience; however, there will likely be a surge in prices which will make it less affordable for the poor Indians who may now have to look for substitutes such as Busses. 

Additionally, there are many other negative economic consequences due to the privatization of railways. Firstly, since the Indian Railways is a natural monopoly, their average costs will continually be falling due to the high fixed costs. One of the primary reasons why the Indian railways incurred losses initially, is due to their pricing strategy. The Indian railways opted for a marginal-cost pricing strategy, which means that the price for tickets was marked to be equal to the price when the Average revenue curve intersected the marginal cost curve, this pricing strategy helped maintain allocative efficiency (as seen in the diagram below) throughout the economy, thus preventing any welfare loss created due to the misallocation of resources. This pricing strategy was the sole reason why the Indian railways were incurring losses (The price charged is lower than the average costs, Pac).

Furthermore, when this natural monopoly gets privatized, the price charged would be Marginal cost (MC) = Marginal Revenue(MR), since that is the profit-maximizing level of output. The main issue that arises due to this pricing strategy is that there will be a misallocation of resources or railway tickets in the economy due to the profit maximization incentive. Hence, resulting in an under allocation of resources. The welfare loss which could arise due to the under allocation of resources would be: Immobility of labor since the primary means of commutation will be hindered. The immobility of energy can result in decelerating aggregate supply.  The occurrence is inevitable because fewer workers will be able to move to other geographical locations for work; consequently, weakening the GDP growth of India. Nonetheless, the lower workforce can also result in rising wages, since the demand for labor is higher than the supply of labor, hence resulting in wage inflation. The inflation can have drastic impacts on international trade, aggregate demand, and the exchange rate of India. Additionally, wage inflation is also likely to enhance the costs of the private firms, thus forcing the firms to layoff employees to reduce the costs, structural unemployment. 

Nevertheless, the reduced expenditure for the government on railways will allow it to spend more on other sectors such as education and healthcare. This can lead to long term growth. Furthermore, the revenue obtained from the privatization of the Indian railways could be used to pay back the debts undertaken due to the outbreak of the coronavirus. Also, this may be a significant step in modernizing the Indian Railways, which is criticized for its poor infrastructure and speed. The railways played a substantial role in the day to day workings of the economy and were, to an extent, functional even during the coronavirus pandemic. The modernization may lead to long term growth, but the short term effects on the poor may be devastating, and the government should ensure that the railways are known for continuing to stay accessible. 


Image Source-- Financial Express

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