Recent development of Air India versus Indian Railways: A comparison of performance characteristics and good governance

• Author: Hans Huber
• Position: Shailesh J. Mehta School of Management, Indian Institute of Technology - Bombay

Comparing the performance of Indian Railways with that of Air India should be an intuitive exercise that allows stressing fundamental issues pertaining to the outlook of two of India’s most prominent PSUs (see Table 1 for a comparison of scale of operations). Although a previous paper (Goyal A., 2008) had already applied principles of Transaction Cost Theory (TCE) to a similar topic, its conclusions can appear ambiguous, providing little scope for effective implementation. Other research compared productivity between Air India and other private airlines in India (Bansal S.C. et al., 2008). Although this approach may be proven, again it failed to make any clear recommendations as to how the strategy of Air India needed to be changed. What is probably more irritating is the fact that both approaches failed to raise a red flag and correctly predict the path to doom that Air India had chosen. In particular, no issues were found regarding the merger activities of NACIL during 2008, on which the author had voiced serious concerns¹ before (Huber H. and Lawrence C., p.67). This concern stood in stark contrast with the support from prominent trade associations and lobbyist (see CAPA, 2009, p.3).

Bringing the discussion to a factual level that allows the independent observer to take a stand seems imperative. As it is the public interest that is at stake, not only from the taxpayer’s perspective (by capital injection or financing of unneeded aircraft purchases): the real issue is about the development path of India as a nation, i.e. the sustained ability of the Government to provide freedom and space to its people through mobility at affordable prices. Such an approach needs to go beyond classic microeconomic analysis, although it would remain deeply economic and political in nature. At this point a strong interdependency between both PSUs becomes clear: losses of one PSU constrain the Government’s (GoI) ability to invest in other modes of transport (deficit spending incurring higher interest rates put aside). Or vice versa, the surpluses made by one PSU (for example through intelligent and responsible management) will tend to subsidize the other loss-making PSU (where poor management or corruption may be at cause). Such inequity becomes all the more scandalous, if it is the common man relying on inexpensive and accessible railway service that eventually has to foot the bill, whereas the subsidized operator is catering to the upper-middle and upper classes. To what extent such win-lose patterns are accurate, of course, depends on the scale of financial surpluses/losses that are involved.

[SEE TABLE IN PDF ATTACHED]

With the author being a transport economist from abroad, political parties in India are not his prime concern. But the political system in India shows that local constituencies, be them in Bihar or Nagpur, may in the end matter for obtaining ever new funds – without any justification on commercial grounds. Also, accountability seems inexistent (numerous examples show that near identical problems do exist in Western countries as well). In other words, no theory (i.e. transaction cost economics) can really explain the tale of two transport PSUs in India: one which had undergone a spectacular transformation, the other factually left bankrupt but no one willing to admit it.

Situation before 2004

By the late 1990’s, the situation of Indian Railways (IR) was judged to be critical and unsustainable. In July 2001, the Rakesh Mohan committee saw IR as being stuck in a ‘debt trap’, partly due to important outlays that had been required for infrastructure maintenance and investment. IR’s ability to self-generate funds had been considered as inadequate.

The idea of possible privatization had met with strong opposition from employees and unions, and thus was abandoned. Issues included ‘Universal Service Obligation’, improvements in both cost and quality, and measures to curb ‘political rent extraction’ due to the impact that ticket pricing could have on state elections. The official recommendations that were given could be qualified as following the canonical neo-liberal template: for example, investments should be rationalized on a purely commercial basis, cross-subsidies between freight and passenger service be stopped, and prices be increased to cover costs. It was found that there was 25% excess manpower – layoffs seemed the natural choice to improve productivity. Investment focus should be laid to the ‘golden quadrilateral’, i.e. railways linking Delhi, Mumbai, Chennai and Kolkata, along with other important cities that were en route. Privatization of IR should remain an option and the highly integrated concern was suggested to be split into independent entities that could be sold off selectively. The expert committee specifically opposed the smaller zones that eventually would be drawn. With hindsight, one can say that it had benefitted IR not to have...