By Centre for Civil Society
Perhaps there exists no state monopoly as large as the Indian railways — it holds the distinction of being one of the largest railway networks and the largest civilian employer in the world — employing over 1.5 million people. It also holds the dubious distinction of being poorly managed, unsafe, and unresponsive to the needs of people and businesses. There would be little disagreement that the sector is desperately in want of reform. How may these changes be brought about?
Many would suggest greater government spending and initiative to overhaul the sector, but another way to overhaul the sector would be to privatize it. This view does not find favor among many people. Indeed, many would deem railways to be ‘too valuable and vital’ a service to be left to private players. It seems to be that the more valuable a particular service is — be it education or railways — the more suspect people are of letting private players provide that service. (Or at least provide that service to the exclusion of state regulation and interference)
In reality, a persuasive case can be made just for the opposite — precisely because a service is vital, it is best to leave it to private initiative and the market — which is to leave it to enterprise and competition; and to free it from state monopoly and stifling regulation.
Briefly, the following is worth considering —
State monopolies are inefficient
When the state assumes monopoly over a particular service, there are consequences. Monopolies in general, and state monopolies in particular; have little incentive to be efficient. State monopolies are shielded through special laws and favors and their losses are borne by taxpayers. Businesses (and even monopolies) in the free market still put their own money at stake — they bear the losses and run out of business if they continue to make losses. State monopolies; having taxpayers’ money to resort to, have no such rigorous constraints. The lack of such constraints, which are natural in a free-market, makes them inefficient.
The State does not have the money
Even if the state was to muster the will to modernize and make massive investments in the sector, it doesn’t have the money. We run high deficits every year, and perhaps it would be wiser to allocate funds in more essential state services (like court systems and law and order); than spend it on a service that can be provided through private means.
Not politically feasible
That which is economically necessary is not always politically feasible. Public choice theory shows us that people act based on self-interest, whether they are consumers, producers or politicians. Therefore, while economically, it might make sense, indeed, be necessary to raise fares; politically — it will not. The opposition parties would frustrate any such measures. While economically, it may be necessary to lay off employees, politically, it would mean for the ruling party to upset and lose its vote bank.The result is that economic decisions are made through political means and the results are neither optimal nor economically efficient. When the state runs a business, the business cannot be free from political interference or hassles. Decisions that ought to be taken by business staking their own money are taken by an indifferent bureaucracy, in line with the wishes of their political leaders.
We bear the cost
Let there be no delusion that the state subsidizing a particular service exempts us from the cost of that service. The costs of inefficiency, that are inevitable with a state monopoly, are borne by all of us — directly in the form of poor service; and indirectly in the form higher taxes and inflation.
Just to give one instance; the lack of investment in goods wagons has led to businesses transporting their freight through road — which is not only more expensive, but also more polluting. And none of us need be reminded of the poor quality of service we experience when we travel through Indian railways.
Privatizing railways would bring in the much needed investment and capital. Any sector that has opened up to private initiative has led to an improvement of the service and a lowering of prices. Why should it be any different for railways?
To be sure, in the short run, privatizing railways may lead to a hike in fares. As prices are no longer kept artificially low, they need to be hiked to cover the costs. But the resultant innovation and investment that would come in from privatization would help bring down the costs and extend quality service to everyone.
India is already reaping the benefits of privatization in airlines; and the benefits are reaped by the consumer in the form of better service and lower fares. The way forward for India lies in privatizing railways and opening it up to private initiative and competition and to unleash the potential that lies stifled due to state control and monopoly. But bold reforms do not come easily.
When good sense conflicts with good politics, seldom does it prevail.
This article has been written by Centre for Civil Society which is an organisation that advances social change through public policy.