Fundamental to business success over and above external market conditions is the ability of a business to move the levers of revenues and costs to drive a sustainable profit margin. As crucial decisions around allowing private players to operate passenger trains are made, a relook at the fundamental requirements for success would be appropriate.
Focus on policy framing and, more importantly, policy implementation will add much value. In this context, the decision to allow private players to operate passenger trains in India is promising, exciting and perhaps one that will need significant focus on policy framing and implementation.
The Indian Railways must improve its revenues vis a vis costs, and that is urgent, especially given the gargantuan size and contribution of the rail network in India. In this context as the policy regarding private operators is constructed, it would be prudent to utilise a simple framework of the classic profit function given by “revenues minus costs” to throw light upon the critical levers of success for the private player scheme in Indian Railways.
On the revenue front, policy clarity on the price will be crucial. Train operators having control over price
will be vital for the success of the venture. While the question regarding prices moving higher is appropriate, one must remember that the trains will compete with alternate modes of transportation such as airlines and roads. Primarily, given the passenger perception of the trade-off between “travel duration and price”, market forces will create a natural price cap.
While the market will create an equilibrium price through demand and supply, it is essential to let private operators determine the price for the service they provide since pricing is probably the most fundamental lever of value creation available.