The proposal to automatically link railway freight rates to fuel prices is a sound one because it tries to deal with the persistent problem of political interference in pricing. The underlying principle should be extended to other public services as well.
The Indian Railways has been starved of investment even as countries such as China have been on a railway-building spree. One reason is that the financial position of the railways has been weak for very long. Almost no railway minister can muster the political courage to hike charges to keep pace with costs.
Railways minister Pawan Kumar Bansal has said in his new railway budget announced on Tuesday that freight rates will be changed twice a year depending on what happens to fuel prices. In a way, this could mark the first step towards the eventual de-politicization of price-setting, hopefully even of passenger fares. The next step should be the setting up of an independent railway tariff authority to set fares, as many experts have suggested.
There are parallels elsewhere as well. Pricing of various utilities is left to the discretion of politicians, with disastrous long-term consequences. For example, free electricity worsens the power crisis by driving away private capital even as farmers get incentives to pump water indiscriminately from the ground. Underpricing of various services also puts immense burden on government budgets. And the benefits of these subsidies are usually captured by the relatively well-off rather than the poor.
What Bansal has done needs to be examined against the broader national issue of budgetary imbalances, the large subsidy bill and the resultant lack of funds to build infrastructure and provide public goods. The 14th Finance Commission headed by Y.V. Reddy has been asked to suggest ways to reduce political discretion. Here is what one of its terms of reference says: “The need for insulating the pricing of public utility services like drinking water, irrigation, power and public transport from policy fluctuations through statutory provisions.”
What India needs is rule-based tariffs that protect the financial viability of as many public projects as possible. In case the political system feels that the poor need help, some form of income support through cash transfers will be a better tool to promote inclusion. In that sense, Bansal has taken an important step.