Syllabus Connect:- GS III ( Infrastructure: Energy, Ports, Roads, Airports, Railways, etc.)
On July 1, 2020, the Indian Railways launched the formal process of inviting private parties to run trains on the Indian railway system. Bids were finally opened last month. Hopes of a large participation were belied as there were no bids for nine clusters and only two bids for three clusters. Even for these three clusters, the only serious bid was by Indian Railways’ (IR) own company IRCTC, which in effect negated the basic objectives of bringing in private capital.
What are the reasons for this failure?
- It is an outcome of the lack of alignment of the interests of IR and the concessioners. IR wants the capital and technology without giving up control, while the concessioner wants a far more equal relationship to be moderated by a regulator.
- IR has imposed constraints that prevent efficient decisions and adopted an organisational design that does not take into account the characteristics and associated risks that will determine outcomes and investment decisions.
What are these risks and constraints?
- Train sets have to be purchased without really knowing how much traffic the service will be able to attract in the face of rising competition from airlines.
- IR does not guarantee the investor that, in case the concession fails, it will acquire the train sets.
- The other big dampener is the absence of a regulator for resolving disputes.
- The proposed independent engineer is far from satisfactory.
But suffice to say that the current model of inviting private players to run trains has failed. To take forward the initiative, a new model based on a new strategy is required.
The central issue is how to align the interests:
India’s need to be capable of designing and manufacturing state-of-the-art rolling stock, IR’s need for private capital participation and private capital’s necessity of earning a profit.
They can be aligned provided the lumpiness of investment in train sets can be eliminated by establishing a company that leases rolling stock not only to concessioners but also to IR. This will also enable reducing the concession period from 35 years to a more reasonable 10-15 years, bringing in competition.
The rolling stock company, apart from leasing train sets, can also be the window for bringing in new technology, preferably by purchasing from those who manufacture in India in collaboration with one of IR’s production units and are willing to transfer the technology.
This will require IR to guarantee a minimum offtake, say for a period of 10 years, to the manufacturer. For starters, IRFC, which is already into leasing rolling stock, can be that company.
A word about bringing in new technology. It is essential that the opportunity opened up by inviting private players is used to move the rolling stock industry up the industrial value chain and bring about a structural change of the Indian economy.
This can only be brought about by a vision that encourages long-term arrangements with rolling stock suppliers. An arrangement that gives access to IR’s rolling stock market is the only way to compel global players to share technology and form joint ventures with Indian companies.
However, technology transfer is not simply a matter of manufacturing in India. It requires understanding the critical elements of the technology and absorbing them into the design-production process.
This calls for the investment of large sums of money and the involvement of universities, research institutes and national laboratories. For example, for developing high-speed train technology, the Chinese involved 25 national first-class key universities, 11 first-class research institutes, and 51 national-level laboratories for research, development and production. India will also need to do something similar.
As far as drawing private players is concerned, all that is required is to reduce the risks for the concessioners, reduce the period of the concession to around 15 years, establish a regulator and moderate charges like the amount for the maintenance of tracks and stations.
With these changes, the plan may still take off. However, the initiative will remain limited to just running trains if there is no long-term vision.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.