The Indian middle class is very unhappy with Budget 2018 as they feel that the government has abandoned them by not providing any specific exemptions. Most believe that a reduction in taxes would have made them happier. Taxation is something that people definitely don&rsquo;t agree with, as most of us think that the government is a cumbersome, lethargic and inefficient beast. And, let&rsquo;s be honest, the government administration is the most responsible for this loss of trust. Their performance in the delivery of public goods to the citizens has been just horrible.&nbsp;

&nbsp;

Let us have a look at what all this mistrust has ended up creating in the society. Entirely new sectors were created because of this mistrust, and now we have started measuring our GDP based on how these sectors perform!! Shocking? No.

&nbsp;

Power sector: For the 70+ years since independence, we have always faced a shortfall in power supply. Investments made by public sector have always been deficient. Regulations for private investments in power generation, distribution and transmission were highly restrictive.&nbsp; The private firms still stepped in. By producing diesel generators (and then inverters). Hi-tech research and design in generators and inverters enabled the citizens of the country to avail of a reliable power supply using these measures. And as is the case for any public good, such private investments were sub-optimal and inefficient in their own way, but at least they achieved the end objective.

&nbsp;

Air Pollution: Over decades, governments have created and modified emission regulations aimed at controlling pollution. All those regulations have only ended up providing rent-seeking opportunities for greedy bureaucrats and have barely made a blip on the pollution scale. Private firms stepped in again. One set of them handled bureaucrats for errant firms (fixers), and another set of them launched air purifiers for the consumers.&nbsp;

&nbsp;

Water Supply: Jal boards were set up in all cities to provide potable drinking water to the citizens. Decades went by, but some bureaucrat thought it was more important to let the administration know how important potable drinking water for citizens (so that a higher budget could be asked for) by hiring more staff to print reports on effects of impure drinking water than investing in personnel and equipment that would actually do so. Private firms thrived by first supplying tankers for providing water and then by supplying water filters and purifiers that would actually address the real need of the citizens.&nbsp;

&nbsp;

Transportation: This actually gets interesting. Reliable, affordable public transport is a dream for Indians. Buses are in dilapidated conditions, never on time and in some cases, frequently on strike! Private firms step in to provide cars and bikes for transportation. Public spending in infrastructure still lags, resulting in traffic snarls and exhausting rides to work. Tech comes in and cab aggregators step in. Cab aggregators address supply-demand mismatch using price as a signal (surge pricing!). So, now government steps in saying surge pricing is unfair to customers! Why did this need ever rise?

&nbsp;

Education: Public firms came up with glorious ideas of IIT-JEE, NEET, CAT, UPSC and more for higher education and government services. Unfortunately, public firms forgot about primary and secondary education. Private firms have stepped up again. Private schools prospered and coaching classes were set up in every nook and corner of the country. The government now attempted to regulate the schools via RTE and further worsened the situation. How the lopsided RTE norms and entrance examination system has corrupted our education system is clearly evident all around us.&nbsp;

&nbsp;

Food grain distribution: Government set out with the noble intention of providing subsidised food grains to the society. The scheme took many shapes over decades. Rampant corruption in the system ensured that the scheme rarely benefited anyone. Its inadequacy in terms of quality, as well as quantity, forced citizens to turn to the private markets for their needs. The government still continues this and has an entire corporation dedicated to it employing 23000 people!

&nbsp;

Railway ticketing: A monopoly that is running in losses. Possibly the only one of its kind in the world. For decades, investments in railways have suffered restricting the overall supply of track capacity. In a vast country like India, trains remained the only way to reach far-off destinations. Limited seats were available. Variety of quotas existed. Private help, in terms of touts, arrived claiming access to seats. Seats were traded for exorbitant fares. Even now, quotas abound. How else would a bureaucrat show his importance to someone than by giving a friend/relative a seat on a train?&nbsp;

&nbsp;

RTO Licensing: A simple procedure was made complicated to deter people from applying for a license directly at the RTO for a driving license. Brokers mushroomed out of nowhere willing to provide a license at your doorstep, for a small fee. Purpose of licensing failed, as seen by the quality of driving on our roads.&nbsp;

&nbsp;

Waste Management: A public good essential for ensuring safe health for citizens, especially in times of epidemics. Public waste management organisations still meander along with ages-old mechanisms of disposing waste. Waste management technology in other countries advanced in leaps and bounds. Private firms have attempted to step in here. How long before the government regulates them into bankruptcy?

&nbsp;

There are countless such examples! Healthcare is an area that is better not ventured into. The judicial system is a big mess. Agriculture has been a bane for all governments. And all of this has influenced our economy and the country so much that we have now started defining our progress by how much profits these firms can make!&nbsp;

&nbsp;

Imagine a hypothetical scenario wherein, tomorrow, all tier-1 and tier-2 cities in India have an efficient, affordable and reliable public transportation system! Citizens would not have to use private transport. But how would that be reported? They would lament the losses that the automobile manufacturers and their ancillaries have to face, how the petrol pumps aren&rsquo;t finding retail customers, how the automotive repair industry has come to a near standstill and many more! But would it be good for the nation? Yes! Would our cities be cleaner and peaceful? Yes! That&rsquo;s exactly how badly successive governments have performed in India.

&nbsp;

Governments, over decades, have done a disservice to the nation in their delivery of services. And through absurd regulations has made it difficult (if not impossible) for private firms to function, without doling out substantial rent to the bureaucrats! If I, as a citizen, find my tax rupees being squandered away in such ways, would I be willing to pay more tax? NO.

&nbsp;

A natural outcome of all the above examples is a mistrust with the government and public administration.&nbsp; Surprisingly, this mistrust still doesn&rsquo;t stop the public from asking for government intervention in many spheres! We still want governments to intervene when schools charge fees, farmers commit suicide, hospitals overcharge patients and more! Do we really expect an entity that has failed to perform a decent job in nearly all aspects of its deliverables to magically transform overnight?&nbsp;

&nbsp;

Yes, our administration is overstaffed, but not where we actually need them to be. There are public servants doing jobs that ought not to exist. For law and order, we need more police on the ground. For swift justice, we need more judges in courts. All of these needs substantial funds. A part of it could be adjusted for by rationalization of current resources. But the rest would have to be funded via taxes. As a citizen, taxation is unavoidable. Asking for accountability from the government is possibly the only way out.&nbsp;

&nbsp;

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)&nbsp;&nbsp;

&nbsp;

Taxation is something that people definitely don’t agree with, as most of us think that the government is a cumbersome, lethargic and an inefficient beast.

The Indian middle class is very unhappy with Budget 2018 as they feel that the government has abandoned them by not providing any specific exemptions. Most believe that a reduction in taxes would have made them happier. Taxation is something that people definitely don’t agree with, as most of us think that the government is a cumbersome, lethargic and inefficient beast. And, let’s be honest, the government administration is the most responsible for this loss of trust. Their performance in the delivery of public goods to the citizens has been just horrible. Let us have a look at what all this mistrust has ended up creating in the society. Entirely new sectors were created because of this mistrust, and now we have started measuring our GDP based on how these sectors perform!! Shocking? No. Power sector: For the 70+ years since independence, we have always faced a shortfall in power supply. Investments made by public sector have always been deficient. Regulations for private investments in power generation, distribution and transmission were highly restrictive. The private firms still stepped in. By producing diesel generators (and then inverters). Hi-tech research and design in generators and inverters enabled the citizens of the country to avail of a reliable power supply using these measures. And as is the case for any public good, such private investments were sub-optimal and inefficient in their own way, but at least they achieved the end objective. Air Pollution: Over decades, governments have created and modified emission regulations aimed at controlling pollution. All those regulations have only ended up providing rent-seeking opportunities for greedy bureaucrats and have barely made a blip on the pollution scale. Private firms stepped in again. One set of them handled bureaucrats for errant firms (fixers), and another set of them launched air purifiers for the consumers. Water Supply: Jal boards were set up in all cities to provide potable drinking water to the citizens. Decades went by, but some bureaucrat thought it was more important to let the administration know how important potable drinking water for citizens (so that a higher budget could be asked for) by hiring more staff to print reports on effects of impure drinking water than investing in personnel and equipment that would actually do so. Private firms thrived by first supplying tankers for providing water and then by supplying water filters and purifiers that would actually address the real need of the citizens. Transportation: This actually gets interesting. Reliable, affordable public transport is a dream for Indians. Buses are in dilapidated conditions, never on time and in some cases, frequently on strike! Private firms step in to provide cars and bikes for transportation. Public spending in infrastructure still lags, resulting in traffic snarls and exhausting rides to work. Tech comes in and cab aggregators step in. Cab aggregators address supply-demand mismatch using price as a signal (surge pricing!). So, now government steps in saying surge pricing is unfair to customers! Why did this need ever rise? Education: Public firms came up with glorious ideas of IIT-JEE, NEET, CAT, UPSC and more for higher education and government services. Unfortunately, public firms forgot about primary and secondary education. Private firms have stepped up again. Private schools prospered and coaching classes were set up in every nook and corner of the country. The government now attempted to regulate the schools via RTE and further worsened the situation. How the lopsided RTE norms and entrance examination system has corrupted our education system is clearly evident all around us. Food grain distribution: Government set out with the noble intention of providing subsidised food grains to the society. The scheme took many shapes over decades. Rampant corruption in the system ensured that the scheme rarely benefited anyone. Its inadequacy in terms of quality, as well as quantity, forced citizens to turn to the private markets for their needs. The government still continues this and has an entire corporation dedicated to it employing 23000 people! Railway ticketing: A monopoly that is running in losses. Possibly the only one of its kind in the world. For decades, investments in railways have suffered restricting the overall supply of track capacity. In a vast country like India, trains remained the only way to reach far-off destinations. Limited seats were available. Variety of quotas existed. Private help, in terms of touts, arrived claiming access to seats. Seats were traded for exorbitant fares. Even now, quotas abound. How else would a bureaucrat show his importance to someone than by giving a friend/relative a seat on a train? RTO Licensing: A simple procedure was made complicated to deter people from applying for a license directly at the RTO for a driving license. Brokers mushroomed out of nowhere willing to provide a license at your doorstep, for a small fee. Purpose of licensing failed, as seen by the quality of driving on our roads. Waste Management: A public good essential for ensuring safe health for citizens, especially in times of epidemics. Public waste management organisations still meander along with ages-old mechanisms of disposing waste. Waste management technology in other countries advanced in leaps and bounds. Private firms have attempted to step in here. How long before the government regulates them into bankruptcy? There are countless such examples! Healthcare is an area that is better not ventured into. The judicial system is a big mess. Agriculture has been a bane for all governments. And all of this has influenced our economy and the country so much that we have now started defining our progress by how much profits these firms can make! Imagine a hypothetical scenario wherein, tomorrow, all tier-1 and tier-2 cities in India have an efficient, affordable and reliable public transportation system! Citizens would not have to use private transport. But how would that be reported? They would lament the losses that the automobile manufacturers and their ancillaries have to face, how the petrol pumps aren’t finding retail customers, how the automotive repair industry has come to a near standstill and many more! But would it be good for the nation? Yes! Would our cities be cleaner and peaceful? Yes! That’s exactly how badly successive governments have performed in India. Governments, over decades, have done a disservice to the nation in their delivery of services. And through absurd regulations has made it difficult (if not impossible) for private firms to function, without doling out substantial rent to the bureaucrats! If I, as a citizen, find my tax rupees being squandered away in such ways, would I be willing to pay more tax? NO. A natural outcome of all the above examples is a mistrust with the government and public administration. Surprisingly, this mistrust still doesn’t stop the public from asking for government intervention in many spheres! We still want governments to intervene when schools charge fees, farmers commit suicide, hospitals overcharge patients and more! Do we really expect an entity that has failed to perform a decent job in nearly all aspects of its deliverables to magically transform overnight? Yes, our administration is overstaffed, but not where we actually need them to be. There are public servants doing jobs that ought not to exist. For law and order, we need more police on the ground. For swift justice, we need more judges in courts. All of these needs substantial funds. A part of it could be adjusted for by rationalization of current resources. But the rest would have to be funded via taxes. As a citizen, taxation is unavoidable. Asking for accountability from the government is possibly the only way out. (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

Opinion: Why citizens dislike paying taxes

Amidst all the &ldquo;last budget&rdquo; euphoria and the high expectations from the general public of it, the budget outlay details for the Indian Railway went relatively unnoticed. And possibly this was the prime reason for merging the Railways budget with the Union budget. Significant reforms are needed in Indian Railways whilst keeping populism at bay.&nbsp;

&nbsp;

The Railways budget has been bumped up from 1.31 lakh crores in 2017-18 to 1.48 lakh crores in 2018-19, an increase of nearly 13%. This substantial increase went mostly under the radar as no fanfare projects like new train announcements were announced. Much of the outlay is towards upgrading the current infrastructure to achieve higher average speeds. Elimination of unmanned road crossings, old track replacement and track strengthening are much needed as the frequency of infrastructure breakdowns have already resulted in an increase in the number of accidents. The 19th January incident near Murad Nagar would also force Railways to rethink plans for enhancing the safety of the infrastructure. The outlay towards safety has been increasing by 6.3% (73065 Cr from 68725 Cr) over the last year&nbsp;

&nbsp;

A significant portion of the budget has been earmarked for upgrading all the 8500 stations with CCTV cameras and escalators for all stations with footfalls more than 25000. CCTV cameras would also be installed in the entire fleet of rolling stock. Fund allocation for increasing rolling stock procurement emphasizes the commitment to upgrading infrastructure. Modern train sets are expected to roll out from the Integrated Coach Factory in Chennai in 2018-19. Mumbai and Bangalore suburban railway networks have also been highlighted for special focus.&nbsp;

&nbsp;

These investments are likely to kick in private investments as well, especially in the station redevelopment process. With an operating ratio of 96% (94.8% target), Railways still needs to increase overall revenues. A 92.8% operating ratio target for 2018-19 seems too ambitious. On the revenue front, the Railway Fare Review committee is yet to be formed. Though overall revenue is up by 7.3%, freight loading is up only by 4.3% (1216 million tonnes from 1165). A detailed review of fare revenue (passenger and freight) and non-fare revenue should help make a true assessment of customers&rsquo; view of Railways as a freight transporter.&nbsp;

&nbsp;

Possibly, the low passenger fares would still continue to crowd out freight share, as the service commitment to the freight customers is still low. Dedicated freight corridors, as mentioned in the budget might help alleviate the situation, but they are still far from completion.&nbsp;

&nbsp;

Infrastructure upgrade is also aimed at lessening the delays in train arrivals. Railways could possibly also consider a hub-and-spoke mechanism of travel within the country, but a significant focus would have to be given to punctuality as well as accessibility at interchange stations.&nbsp;

&nbsp;

Transportation infrastructure investments have been a key focus of the BJP government since coming to power. Holistically, the Railways future plans must be seen in the overall context of transportation including roads, airways and waterways. A unified system of transportation should ease the issues of traversing this vast country, quickly and inexpensively. Overall, the budget holds steady on the promise of capacity augmentation and infrastructure upgrade. The effectiveness of implementation remains to be seen.&nbsp;

&nbsp;

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)&nbsp;&nbsp;

Overall, the Union Budget holds steady on the promise of capacity augmentation and infrastructure upgrade. However, the effectiveness of implementation remains to be seen.

Amidst all the “last budget” euphoria and the high expectations from the general public of it, the budget outlay details for the Indian Railway went relatively unnoticed. And possibly this was the prime reason for merging the Railways budget with the Union budget. Significant reforms are needed in Indian Railways whilst keeping populism at bay. The Railways budget has been bumped up from 1.31 lakh crores in 2017-18 to 1.48 lakh crores in 2018-19, an increase of nearly 13%. This substantial increase went mostly under the radar as no fanfare projects like new train announcements were announced. Much of the outlay is towards upgrading the current infrastructure to achieve higher average speeds. Elimination of unmanned road crossings, old track replacement and track strengthening are much needed as the frequency of infrastructure breakdowns have already resulted in an increase in the number of accidents. The 19th January incident near Murad Nagar would also force Railways to rethink plans for enhancing the safety of the infrastructure. The outlay towards safety has been increasing by 6.3% (73065 Cr from 68725 Cr) over the last year A significant portion of the budget has been earmarked for upgrading all the 8500 stations with CCTV cameras and escalators for all stations with footfalls more than 25000. CCTV cameras would also be installed in the entire fleet of rolling stock. Fund allocation for increasing rolling stock procurement emphasizes the commitment to upgrading infrastructure. Modern train sets are expected to roll out from the Integrated Coach Factory in Chennai in 2018-19. Mumbai and Bangalore suburban railway networks have also been highlighted for special focus. These investments are likely to kick in private investments as well, especially in the station redevelopment process. With an operating ratio of 96% (94.8% target), Railways still needs to increase overall revenues. A 92.8% operating ratio target for 2018-19 seems too ambitious. On the revenue front, the Railway Fare Review committee is yet to be formed. Though overall revenue is up by 7.3%, freight loading is up only by 4.3% (1216 million tonnes from 1165). A detailed review of fare revenue (passenger and freight) and non-fare revenue should help make a true assessment of customers’ view of Railways as a freight transporter. Possibly, the low passenger fares would still continue to crowd out freight share, as the service commitment to the freight customers is still low. Dedicated freight corridors, as mentioned in the budget might help alleviate the situation, but they are still far from completion. Infrastructure upgrade is also aimed at lessening the delays in train arrivals. Railways could possibly also consider a hub-and-spoke mechanism of travel within the country, but a significant focus would have to be given to punctuality as well as accessibility at interchange stations. Transportation infrastructure investments have been a key focus of the BJP government since coming to power. Holistically, the Railways future plans must be seen in the overall context of transportation including roads, airways and waterways. A unified system of transportation should ease the issues of traversing this vast country, quickly and inexpensively. Overall, the budget holds steady on the promise of capacity augmentation and infrastructure upgrade. The effectiveness of implementation remains to be seen. (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

Opinion: Union Budget invested in Railways without giving in to populism

Indian Railways recently announced the introduction of dynamic pricing (DP) on trains, such as the Rajdhani Express, Duronto and Shatabdi with the fares increasing by 10 per cent after every 10 per cent berths being sold, but a cap of maximum 50 per cent hike has been placed on the original fare. Across segments of the population, DP has been painted as evil and designed to hurt travelers. Dynamic pricing, most famously introduced by the American Airlines (AA) in 1988, is being scrutinised by the whole nation. AA estimated the benefit to be around $1.4 billion over three years (at 1990s prices) and expected a steady state contribution of over $500 million through the implementation. This has given rise to a completely new area of research and application in Revenue Management (RM). The field finds wide usage and adoption in many industries, including airlines, railways and hotels amongst others. &nbsp;

Fundamentals of dynamic pricing 
Humans love certainty. All of our efforts go into trying to convert uncertain situations into certain ones. And we Indians love prices that are not only certain but also low! But in the real world, certainty is a myth. Businesses operate under huge uncertainties.&nbsp;

The cost of inputs, the nature of demand and the cost of servicing the demand are all exposed to uncertainties. Any change in any of these parameters severely affects the cost of satisfying the demand. Especially in hospitality and transportation (or logistical) businesses. This is primarily due to the &ldquo;perishable&rdquo; nature of the products that they sell.&nbsp;

Perishability: In this context, we use the term perishable to refer to its shelf life. An airline cannot sell a seat once the flight takes off. A hotel that has an empty room for a day cannot go back in time and sell the room. The revenue foregone due to this perishable nature is detrimental to the ranking of the firm. It would do well to remember that the additional cost incurred by the firm on selling the seat or selling the room at a low price is way less than the additional revenue it would have earned from it.&nbsp;

So, the logical question comes up. If that&rsquo;s the case, why increase prices? Just sell it at any price more than the cost of providing the service.

Yes, that is what DP is actually meant to achieve. In times of low demand, the system tries to increase occupancy by selling seats or rooms at lower prices (obviously above the floor price) to reduce the losses. The losses are made up by charging a premium in situations of high demand.

The popular assumption is DP is time-based, that is, if a ticket is bought closer to the departure time, the price of the ticket would necessarily be higher. But true DP models are not. They are purely demand based.

How does dynamic pricing work?&nbsp; 
The primary objective of such a model is to maximise load factors or occupancy factors for the trains while maximising revenue.&nbsp; Occupancy or load factors are a widely used metric in the hospitality and logistics industry. DP algorithms work to ensure higher load factors via pricing differentiation. This is done by rewarding customers with certain travel plans and extracting a rent from customers with uncertain travel plans. However, this rent extraction is only possible if there is high demand.

DP categorises the resources available into categories or buckets. For ease of understanding, let us consider just three buckets; low fare (deep discount), regular fare and premium fare. All these three buckets are for service at the same class level, providing the same facilities.&nbsp;

The first bucket sells resources at low fares (40-50 per cent of the actual fare) to achieve high occupancy. But to keep the service viable, a minimum occupancy factor is needed; think of it like the minimum customers that a hotel must have to sustain itself. However, these discounts come with a caveat. These fares are non-refundable because the service provider is selling you at a cheaper fare to ensure occupancy levels. In case you back out, the occupancy level of the service goes down and the firm needs to reduce its losses.&nbsp;

If you don&rsquo;t want to take up this offer from the service provider, you can choose to pay the regular fare with the regular refund restrictions. Once the first bucket is full, no more low fares are on offer. Once the second bucket is full, even the regular fares are exhausted. Only premium fares are available.&nbsp;

Generally, premium fare bucket differs from the other buckets in the sense that there is no fixed fare. For example, given high demand, the 10th person who buys a ticket would be paying more than the 9th person who bought the ticket. The sale of this ticket indicates the existence of heavy demand. I am sure you remember how touts earlier sold train tickets priced originally at Rs. 500 for&nbsp;Rs. 3000? It was informal DP at work.&nbsp;

The really good DP algorithms have a few additional features:

&nbsp;Dynamic bucket sizes: Based on historical data and expected demand, buckets sizes are not static. This means that the same fare bucket would have different number of seats available at different times of the year.

Migration between buckets: Based on factors, such as current booking trends&nbsp;compared to historical data, closeness to departure time, seats can shift between buckets. For example, if the time is close to departure and a large number of seats in the premium bucket are unsold, these seats would be shifted towards regular fare bucket or even the low fare bucket. Hence, it is possible to get low fare seats even minutes before departure due to low demand.

Number of buckets: Based on the levels of price discrimination that the service wants to offer, it can have more buckets. This helps to gain better revenues for the service provider.

&nbsp;Price discrimination within bucket: Seats getting booked quickly within a bucket implies high demand. The same price discrimination system applied in the premium category can be applied within other buckets as well. So the first ticket sold in the low fare bucket would be quite cheap as compared to the last seat in the same bucket.

How is it different in the Indian Railways? 
Firstly, there is no additional advantage for a traveler with a certain plan. Regular fares are same as low fares, the traveler gets no discount. The argument given for&nbsp;this is, regular fares are already below par. But these fares are refundable. So from the perspective of the IR, is this helpful in guaranteeing occupancy?&nbsp; No.&nbsp;

What&rsquo;s the flip side? Rationalisation of demand is very much needed to meet supply-demand mismatch. Because refunds are nearly full and overbooking is rampant. Trains with waitlisted tickets sometimes have occupancy as low as 60 per cent. Revoking the Ticket Deposit Receipt, submitted in case of inability to undertake the journey, to obtain a refund has been a logical&nbsp;step in this direction.&nbsp;

Secondly, the DP model of IR occurs in flat and established discrete steps:&nbsp;10 per cent increment after 10 per cent seats gets full. This happens irrespective of the rate of demand and&nbsp;is totally contrary to the underlying principles of DP.

Thirdly, there is no true dynamism in the prices. Prices can move only up and not down. Here, they make an assumption of demand being greater than supply at all times. While this may be true for regular fares during normal periods, this may not hold true for premium fares. There is a high chance of seats going unoccupied in such cases, defeating the primary purpose of dynamic pricing.&nbsp;

There is no migration between regular and premium fares according to demand. A fixed quota of seats is earmarked. There are several possible reasons behind this policy, such as:

Bureaucratic approach: A mindset entrenched in certainty that believes in&nbsp;fixed quotas mean fixed prices. This is what happens when a business is viewed as a government department. This is highly harmful to businesses operating in an uncertain environment. Fixing important parameters leave seats unsold. Bureaucrats don&rsquo;t answer for unsold seats and unrealised revenue. Additionally, the unsold seats are used to appease the unauthorised &ldquo;stakeholders&rdquo;.

&nbsp;Citizens&#39; approach: We have taken Indian Railways for granted. Anything that departs from the traditional way of operations is taken as taking away some fundamental right.&nbsp;

What the Indian Railways should do? 
The first step is to introduce non-refundable deep discount fares. Announce this move, but do not disclose the number of seats in this bucket. Airlines do not disclose their pricing structure. Even Air India doesn&rsquo;t.

People from the lower-middle class who travel long distances for vacations (infrequent travel) will be hugely benefited. This is because their travel plans are mostly certain and they can take advantage of the deep discount fares. Adding the no refund clause also reduces bogus bookings by touts.&nbsp;

It is necessary to introduce partially refundable discount fares. Refund rules have to be stringent than regular fare class, but lenient when compared to deep discount fares.&nbsp;

IR has to introduce dynamic bucket allocation. They have to adopt the dynamic pricing model in its entirety and not piecemeal. It needs to be introduced across all express trains, in all classes, not for a few months, but for a whole year.&nbsp;

All quota need to be removed. If needed, coupons or vouchers have to be introduced. Every quota is a leakage that needs to be plugged.&nbsp;

The first two steps help in covering up occupancy issues and appeasing the masses. The next two steps help in garnering the revenue needed for future investments.&nbsp;

Yes, of course, we must ask Indian Railways to cut costs and manage itself more efficiently. But that&rsquo;s a different topic, needing&nbsp;a different article.&nbsp;

&nbsp;

&nbsp;

&nbsp;

The demand based dynamic pricing system converts uncertain situations into certain ones

Indian Railways recently announced the introduction of dynamic pricing (DP) on trains, such as the Rajdhani Express, Duronto and Shatabdi with the fares increasing by 10 per cent after every 10 per cent berths being sold, but a cap of maximum 50 per cent hike has been placed on the original fare. Across segments of the population, DP has been painted as evil and designed to hurt travelers. Dynamic pricing, most famously introduced by the American Airlines (AA) in 1988, is being scrutinised by the whole nation. AA estimated the benefit to be around $1.4 billion over three years (at 1990s prices) and expected a steady state contribution of over $500 million through the implementation. This has given rise to a completely new area of research and application in Revenue Management (RM). The field finds wide usage and adoption in many industries, including airlines, railways and hotels amongst others. Fundamentals of dynamic pricing Humans love certainty. All of our efforts go into trying to convert uncertain situations into certain ones. And we Indians love prices that are not only certain but also low! But in the real world, certainty is a myth. Businesses operate under huge uncertainties. The cost of inputs, the nature of demand and the cost of servicing the demand are all exposed to uncertainties. Any change in any of these parameters severely affects the cost of satisfying the demand. Especially in hospitality and transportation (or logistical) businesses. This is primarily due to the “perishable” nature of the products that they sell. Perishability: In this context, we use the term perishable to refer to its shelf life. An airline cannot sell a seat once the flight takes off. A hotel that has an empty room for a day cannot go back in time and sell the room. The revenue foregone due to this perishable nature is detrimental to the ranking of the firm. It would do well to remember that the additional cost incurred by the firm on selling the seat or selling the room at a low price is way less than the additional revenue it would have earned from it. So, the logical question comes up. If that’s the case, why increase prices? Just sell it at any price more than the cost of providing the service. Yes, that is what DP is actually meant to achieve. In times of low demand, the system tries to increase occupancy by selling seats or rooms at lower prices (obviously above the floor price) to reduce the losses. The losses are made up by charging a premium in situations of high demand. The popular assumption is DP is time-based, that is, if a ticket is bought closer to the departure time, the price of the ticket would necessarily be higher. But true DP models are not. They are purely demand based. How does dynamic pricing work? The primary objective of such a model is to maximise load factors or occupancy factors for the trains while maximising revenue. Occupancy or load factors are a widely used metric in the hospitality and logistics industry. DP algorithms work to ensure higher load factors via pricing differentiation. This is done by rewarding customers with certain travel plans and extracting a rent from customers with uncertain travel plans. However, this rent extraction is only possible if there is high demand. DP categorises the resources available into categories or buckets. For ease of understanding, let us consider just three buckets; low fare (deep discount), regular fare and premium fare. All these three buckets are for service at the same class level, providing the same facilities. The first bucket sells resources at low fares (40-50 per cent of the actual fare) to achieve high occupancy. But to keep the service viable, a minimum occupancy factor is needed; think of it like the minimum customers that a hotel must have to sustain itself. However, these discounts come with a caveat. These fares are non-refundable because the service provider is selling you at a cheaper fare to ensure occupancy levels. In case you back out, the occupancy level of the service goes down and the firm needs to reduce its losses. If you don’t want to take up this offer from the service provider, you can choose to pay the regular fare with the regular refund restrictions. Once the first bucket is full, no more low fares are on offer. Once the second bucket is full, even the regular fares are exhausted. Only premium fares are available. Generally, premium fare bucket differs from the other buckets in the sense that there is no fixed fare. For example, given high demand, the 10th person who buys a ticket would be paying more than the 9th person who bought the ticket. The sale of this ticket indicates the existence of heavy demand. I am sure you remember how touts earlier sold train tickets priced originally at Rs. 500 for Rs. 3000? It was informal DP at work. The really good DP algorithms have a few additional features: Dynamic bucket sizes: Based on historical data and expected demand, buckets sizes are not static. This means that the same fare bucket would have different number of seats available at different times of the year. Migration between buckets: Based on factors, such as current booking trends compared to historical data, closeness to departure time, seats can shift between buckets. For example, if the time is close to departure and a large number of seats in the premium bucket are unsold, these seats would be shifted towards regular fare bucket or even the low fare bucket. Hence, it is possible to get low fare seats even minutes before departure due to low demand. Number of buckets: Based on the levels of price discrimination that the service wants to offer, it can have more buckets. This helps to gain better revenues for the service provider. Price discrimination within bucket: Seats getting booked quickly within a bucket implies high demand. The same price discrimination system applied in the premium category can be applied within other buckets as well. So the first ticket sold in the low fare bucket would be quite cheap as compared to the last seat in the same bucket. How is it different in the Indian Railways? Firstly, there is no additional advantage for a traveler with a certain plan. Regular fares are same as low fares, the traveler gets no discount. The argument given for this is, regular fares are already below par. But these fares are refundable. So from the perspective of the IR, is this helpful in guaranteeing occupancy? No. What’s the flip side? Rationalisation of demand is very much needed to meet supply-demand mismatch. Because refunds are nearly full and overbooking is rampant. Trains with waitlisted tickets sometimes have occupancy as low as 60 per cent. Revoking the Ticket Deposit Receipt, submitted in case of inability to undertake the journey, to obtain a refund has been a logical step in this direction. Secondly, the DP model of IR occurs in flat and established discrete steps: 10 per cent increment after 10 per cent seats gets full. This happens irrespective of the rate of demand and is totally contrary to the underlying principles of DP. Thirdly, there is no true dynamism in the prices. Prices can move only up and not down. Here, they make an assumption of demand being greater than supply at all times. While this may be true for regular fares during normal periods, this may not hold true for premium fares. There is a high chance of seats going unoccupied in such cases, defeating the primary purpose of dynamic pricing. There is no migration between regular and premium fares according to demand. A fixed quota of seats is earmarked. There are several possible reasons behind this policy, such as: Bureaucratic approach: A mindset entrenched in certainty that believes in fixed quotas mean fixed prices. This is what happens when a business is viewed as a government department. This is highly harmful to businesses operating in an uncertain environment. Fixing important parameters leave seats unsold. Bureaucrats don’t answer for unsold seats and unrealised revenue. Additionally, the unsold seats are used to appease the unauthorised “stakeholders”. Citizens' approach: We have taken Indian Railways for granted. Anything that departs from the traditional way of operations is taken as taking away some fundamental right. What the Indian Railways should do? The first step is to introduce non-refundable deep discount fares. Announce this move, but do not disclose the number of seats in this bucket. Airlines do not disclose their pricing structure. Even Air India doesn’t. People from the lower-middle class who travel long distances for vacations (infrequent travel) will be hugely benefited. This is because their travel plans are mostly certain and they can take advantage of the deep discount fares. Adding the no refund clause also reduces bogus bookings by touts. It is necessary to introduce partially refundable discount fares. Refund rules have to be stringent than regular fare class, but lenient when compared to deep discount fares. IR has to introduce dynamic bucket allocation. They have to adopt the dynamic pricing model in its entirety and not piecemeal. It needs to be introduced across all express trains, in all classes, not for a few months, but for a whole year. All quota need to be removed. If needed, coupons or vouchers have to be introduced. Every quota is a leakage that needs to be plugged. The first two steps help in covering up occupancy issues and appeasing the masses. The next two steps help in garnering the revenue needed for future investments. Yes, of course, we must ask Indian Railways to cut costs and manage itself more efficiently. But that’s a different topic, needing a different article.

Dynamic pricing: Indian Railways cope with the uncertainties of business

Author

Zee News Rajasthan

Editor

Harish Rao

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