| TRANSPORT ECONOMICS. |
India doesn't have transport economists, only transport managers and transport bureaucrats. No wonder the sector is so misunderstood.
Almost unnoticed, over the last 20 years, the transport business has been globalised and liberalised almost to the extent of finance. It is now broadly called logistics and comprises not just the means of moving goods and people, but also of their storage — including indeed of people, as seen from the facilities now available in airports and railway stations.
Huge amounts of capital have been invested in the business, which has gone from being mostly a state-financed sector to one with large dollops of private capital. While this has led, overall, to greater efficiency in moving and storing, it has also thrown up some interesting issues for domestic transport providers.
Stripped to its essentials, the problem to be solved is this: how can state subsidies be substituted by intra-firm cross subsidisation of products. That it has happened and is happening is not in question.
But investors haven't been very happy with this practice because, by its very nature, intra-firm cross subsidisation of products is an opaque accounting phenomenon that permits creative accounting to be taken to new heights.
The problem has become especially acute when large firms have merged to create even larger firms, which have then proceeded to buy out smaller firms in order to increase market share.
Some of these smaller have been highly profitable and have been used to cross-subsidise the larger ones. The reverse has also been true. A complicating factor is the fact that transport has acquired aspects of a public good which is why governments have created regulators.
Right pricing
This, in turn, has created a new problem for firms: how to fully reflect costs in the prices charged for a service when it is viewed as a quasi public good or, as they are called in India, “essential commodities”.
The consequence is a thorny problem of political economy, especially in developing countries that have to strike a fine but dynamic balance between efficiency and equity.
Emphasising efficiency may mean that millions can't use the service, so have to use their own traction — walk or cycle over long distances. Emphasising equity could mean bankrupt firms, like our State transport providers.
The issue eventually boils down to deciding whether costs should be fully reflected at all levels of the service or only partially; and, if the latter, how to fund the gaps.
This is where State subsidies, or in their absence, intra-firm cross-subsidisation comes in.
Even where a subsidy (or cross-subsidisation) is deemed appropriate, the question remains: should it come to the fixed infrastructure, or to the service itself, or both.
Intra-firm subsidies can also result in huge arbitrage opportunities for firms, when they milk one service, the demand for which is inelastic, to fund another for which demand is less inelastic, and thus make huge profits. The Indian Railways is a classic example of this.
They are ripping off the freight customers to subsidise passengers whose demand is not all that inelastic.
And, although pricing plays an important role in investment allocation, the Indian Railways is not doing even that, so that the excess profit from freight operations is not being used to enhance freight carrying capacity, at least not in the degree possible. Instead, politicians are milking the system for votes.
There is perhaps a sensible way out of the problem: the State should invest in fixed infrastructure alone and leave the services to the private sector. This would give real meaning to public-private partnerships, rather than the crony-ism it has come to involve now. The airline business is a good example of this.
TAX ISSUES
It would, even more importantly, take care of the related tax issues as well. At present, tax benefits are available only for fixed infrastructure, which is not fair because even moveable assets require huge investments.
This does not mean that ship, airline, bus, truck and rail operators should enjoy tax benefits; it only means that if the State develops the fixed infrastructure such as roads, ports, airports, railway stations and so on, the investment will not get tax breaks as they will be financed by tax revenues, not risk capital, either debt or equity.
I doubt, however, if the Planning Commission will pay heed. It is on its own trip, as they say, and as always, behind the curve.
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