Yes, minister, India’s economy works just like its trains—it doesn’t

Sadananda Gowda, the Indian minister of railways, made a very telling statement in his railway budget presented to the Indian parliament on July 8: “Indian Railways, being the nation’s prime mover, is the structure and soul of Indian economy.”

Indeed, the Indian railways are a model of the Indian economy. Outdated, government controlled, incompetently managed, ravaged by rampant corruption, loss-making, a legacy of the old colonial raj: it’s hard to tell if one is describing the Indian economy or the Indian railways.

Looking out the grimy windows of any train anywhere in India, your gaze meets trash. Not just the unsightly heaps of garbage but, more disturbingly, an unconscionable waste of resources. Scattered along every yard of the tracks are piles of steel rails and fishplates that seem to equal, in amount, the ones actually in use. Those in charge of the railways did not bother to use them because they did not bear the cost of those resources. Indians, including the poorest of the poor, paid for them.

These are the same poor on whose behalf the Indian government claims to run the railways, which is a “commercial enterprise but serve like a welfare organization,” as the minister himself admitted. Which is a contradiction in terms: is it is a welfare organization, or is it a commercial enterprise?

The Indian railways represent what is wrong with the Indian economy and the perceived role of the government. There are broader lessons to draw here. Among them:

1. The government has no business being in business.

The role of the government is to govern. It has neither competitive nor comparative advantage in running commercial enterprises. Its role in commerce should be limited to ensuring that private commercial enterprises compete in providing goods and services while following established rules of the game.

Transportation is not the government’s job. The government must not be in the business of running airlines, bus lines, taxi services or railways.

2. The government is not the ruler and the people are not its servants.

This is a hold-over from colonial times when Indians were subjects of the British rulers. The railway minister quoted Kautilya in his speech—“the happiness of the people lies the Ruler’s happiness. Their welfare is his welfare”—seemingly unaware that, in a democracy, those in government are actually the agents of the citizens who are the principal.

Rulers and democracy don’t mix.

3. Monopolies—public and private sector alike—are harmful.

Facing no competition, monopolies lack the disciplining that markets provide, which force corporations to deliver value to their customers. Indian railways have no incentive to improve their service, do not face a hard budget constraint and have a captive customer base of 1.2 billion.

This means that they can get away with shoddy service and poor quality. The only game in town has to be, de facto, the best game in town.

4. Messing with prices introduces distortions that are socially costly.

The railways subsidize passenger traffic by raising freight tariffs. The railways’ share of aggregate freight transportation is only 31%, and has been declining.

Steel rails on steel wheels is one of the most efficient means of transportation. Raising rail freight tariffs beyond costs leads to the diversion of freight to roads, with enormous costs in terms of road congestion and pollution.

Not so superfast

India needs a robust, efficient, modern, mass transportation system for it to become even a moderately performing economy. As long as the government continues its stranglehold on the railways, that is unlikely to happen.

A few months ago, in India, I took a train that from Mumbai to Nashik, in Maharastra, was billed as a Superfast Express (SF). I calculated its average speed to be around 55 kph (around 34 mph.) So I figured a fast express does 45 kph; an express does 35 kph; and non-express train does 20 kph (not much more than a brisk jogging speed). Such is the speed of the country.

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Until there is a political will to change the situation, the Indian economy will indeed keep pace with its government-run trains—or perhaps it’s actually the other way around.

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