While freight rates were revised on 23 August by changing the distance slabs, a fare hike for high-end passenger trains—Rajdhani, Shatabdi and Duronto—was effected through a dynamic pricing system, which charges consumers more when fewer tickets are available.

The indirect way of raising fare revenue comes in the wake of past political opposition to upfront hikes in the budget.

In 2012, the then railway minister Dinesh Trivedi of Trinamool Congress had to quit after his party boss Mamata Banerjee demanded that fare hikes of 2-30 paise per km be rolled back.

Experts said it is better to make fare changes outside the rail budget. “It makes sense to keep the Railway Budget as a policy statement and calibrate the fare from time to time in response to market dynamics," said Manish Sharma, partner, infrastructure, PwC India.

In addition, said a railway official who asked not to be identified, it is politically wise to do so. “Everyone knows that passenger fare increase is a highly volatile matter. That is why the government did not tweak them in the last two budgets despite several strong recommendations," the official said. Flexi fare for premium trains is expected to go down well with consumers in the premium segment for whom the government is in the process of introducing several high-value services such as magnetic levitation, or maglev, trains, the official said.

Former Railway Board chairman Arunendra Kumar said the introduction of flexi fare was a good move to experiment with surge pricing and to address the Railways’ financial woes.

Enhancing fares with least political resistance is vital for Railways that has a Rs8.5 trillion capital expenditure target over five years and is facing a Rs33,000 crore revenue loss this year from subsidizing passenger transport.

The flexi fare system will add about Rs500 crore this year to the national carrier’s revenue, said Anant Swarup, executive director, public grievances at the railway minister. Railways will have to spend Rs30,000 crore more this year to pay the higher wages recommended by the seventh pay commission, Swarup added.

Railways, which depends heavily on freight revenue to subsidize passenger fares, is facing an estimated 11% decline in freight revenue in 2016-17 financial year, from the previous fiscal, partly on account of slower economic growth. Its gross earnings in April-August fell 5% to Rs64,368 crore.

The power ministry’s steps to rationalize coal movement from mines to power plants to lower the cost of electricity generation too has affected railway freight revenue.

This has, however, helped state-run NTPC Ltd to cut its power tariff to distribution companies by up to 50 paise per kilo watt hour across regions in the April-June period.

In August, Railways raised the coal freight rate by 8-14% for distances between 200 km and 700 km and lowered it by 4-13% for distances above 700km. Rates for distances up to 200 km were kept unchanged. While Railways says the change is revenue-neutral for it, power producers have said there will be an increase in power generation cost of 6-7 paise per unit for those in the 200-700 km range.

According to D.K. Joshi, chief economist at ratings firm Crisil, Railways, which has a high investment requirement, needs to make its operations self-sustaining. Joshi said progressive increase in fares along the higher end of service does not burden the poor.

“Passenger fares are underpriced. Relying excessively on freight for revenue is distortionary in nature and impacts the economy’s competitiveness," said Joshi.

The national carrier is also trying to increase its revenue from other sources. “We are trying to boost non-fare revenue from sources like advertisements on board trains that presently contribute about 5% of revenue to about 20-30% in a few years," added Swarup.

According to an analysis made by Railways comparing rail and airfare between Delhi and cities like Mumbai, Chennai, Howrah and Lucknow, a second class AC ticket under the flexi fare system will still be cheaper than an airline ticket.

Flexi pricing will apply to 142 trains comprising 42 Rajdhanis, 46 Shatabdis and 54 Durontos.

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