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MONOPOLY OF INDIAN RAILWAY

1. Your Name: - Abhijith B. Rao 2. Batch: - PGCBM 15 3. SMS ID: - RB09068 4. Name of the Topic: - Managerial Economics - Monopoly 5. Name of the Faculty: - Prof Vishwa Ballabh 6. Name of the Study Center: - Airport Road, Bangalore

Indian Railway Industry:

1. Monopoly firms are price makers. 2. Monopolies can achieve any level of profit they want because high prices reduce the amount that their customers buy. Monopolies can control the prices of their goods, their profits are not unlimited. this is what the railway ministry did. They increased the profit by decreasing the price of the railway tickets purchased by the customers and still keeping the ticket amount more than the marginal cost. 3. Railway is a monopoly firm because it is owned by the Indian Government and this is good in the interest of public. 4. This is not a natural monopoly as this is the only single firm in India. 5. If you see the budget and the annual summary report of Railway ministry, the number of passengers has increased and in turn the profit generated by this also has increased. If you look at the below chart, till year 2001-02 the number of consumers were static between 4000-5000. When the new railway ministry came in power in the year 2003-04, there was an increase in number of consumers and also the earnings. Details about how it became a profit organization is given at the end.
Year 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Number of Passengers (in millions) 4348 4411 4585 4833 5093 4971 5112 5378 5725 6219 Earnings (in crores) 7554 8526.7 9555.6 10483.2 11162.2 12540.8 13259.8 14072.52 15080.77 17176.01

6. As per the consumer requirement, the railway increased its services by installing new rails for different locations with the same price. This method took care of the society requirement and removed the deadweight loss. However, for some regions, this method has not yet been implemented but might be in near future as per the requirement and priority of the requirement. 7. Public Policy toward Monopolies: Monopolies in contrast to competitive markets, fail to allocate resources efficiently. Policymakers in the government can respond to the problem of monopoly in one of four ways. a. Increasing competition with antitrust laws. b. Regulation By regulating the behavior of the monopolies. c. Public Ownership By turning some private monopolies into public enterprises. d. By doing nothing at all. 8. In our scenario, Indian Railways comes under Public Ownership Monopoly. When the Railways was started in 1853, it was owned by 2 companies. They were Great Indian Peninsular Railway (GIPR) and East Indian Railway (EIR). In 1923, both GIPR and EIR were nationalized with the state assuming both ownership and management control and was christened as the Indian Railways. 9. Indian Railways, which a few years ago was operating at a loss, has, in recent years, been generating positive cash flows and been meeting its dividend obligations to the government. The railway reported a cash surplus of INR 9000 cr in 2005, INR 14000 cr in 2006, INR 20,000 cr in 2007 and INR 25,000 cr for the 2007-2008 fiscal year. Its operating ratio improved to 76% while, in the last four years, its plan size increased from INR 13,000 cr to INR 30,000 cr. The proposed investment for the 2008-2009 fiscal year is INR 37,500 cr, 21% more than for the previous fiscal year. Budget Estimates-2008 for Freight, Passenger, Sundry other Earnings and other Coaching Earnings have been kept at INR 52,700 cr, INR 21,681 cr, INR 5,000 cr and INR 2,420 cr respectively. Maintaining an overall double digit growth, Gross Traffic Earnings have been projected as INR 93,159 crore in 2009-10 (19.1 billion USD at current rate),

exceeding the revised estimates for the current fiscal by INR 10,766 crore. Around 20% of the passenger revenue is earned from the upper class segments of the passenger segment (the air-conditioned classes). 10.After turning into profit making firm, the gainers due to this were the Consumers, Tax payers and in turn the Government which is a good sign of prosperity in Indian society. 11. In Railway industry, Price Discrimination is done only with the different services provided. Like Sleeper Class, AC Class, General Compartment, Goods Carrier etc have different rates. This is required to separate customers according to their willingness to pay. 12. Price Discrimination is a rational strategy and using this rule, Railway maximized its profit. 13. By following all the rules and with the above examples and proofs, Railway increased the economic welfare of Indian Society. 14.Further, the railway gives out contracts for food catering through IRCTC in specific lines and this will be a sub monopoly for the food industry until the contract gets over. How was the Indian Railways run before Lalu Prasad took charge? The guiding principle was simple: Raise passenger fares and the freight rates to compensate for the rise in input costs. In the 1990s, its market share in freight had come down to 33 per cent by 2004, compared to 89 per cent in 1950. In sharp contrast, Lalu Prasad's idea was that a cow must be milked fully if it were not to fall sick. Elaborating it further, he argued that the wagon was the Indian Railways' bread-earning horse. The wagon, therefore, must be loaded adequately. This basic idea was implemented by the Indian Railways in the last five years - as the wagons' carrying capacity was raised and their turnaround time was reduced. Results showed in higher volumes of traffic, increasing market share and higher surpluses even though there was no across-the-board hike in freight rates. So, the strategy was to reduce the unit cost of transportation by improving freight volumes (load the horse adequately!). In 2005, for instance, the marginal revenue for every incremental one million tones of freight was estimated at Rs 53 crore (Rs 530 million), while the marginal cost of carrying that incremental freight was only Rs 13 crore (Rs 130 million), leaving marginal net revenue of Rs 40 crore (Rs 400 million). The huge annual surplus that Lalu Prasad has managed to show in the last few years is primarily because of the successful implementation of this strategy. Reference: http://www.indianrailways.gov.in/deptts/stat-eco/annual-rep-0607/summery-sheet.pdf http://en.wikipedia.org/wiki/Indian_Railways http://www.iimahd.ernet.in/~graghu/Vikalpa/Turnaround_axleloading_33207-ManagementCase-087to119.pdf http://in.rediff.com/money/2008/feb/27budget1.htm