This is Bad Economics, Mr. Issac

What is the similarity between the Finance Minister of Kerala, Mr. Thomas Issac and I? - We both did our graduation in Economics from University of Kerala.

What are the differences between him and I? – Firstly, I am still only a student of Economics, while he is an expert Economist with years of teaching and research experience in the subject. Secondly, despite being an Economics graduate I pursued another stream and did my post graduation in management from University of Kerala, where as he did his higher studies in Economics from the JNU. Thirdly, I know that an increase in bus fare is not the right option to reduce the losses that KSRTC face, but he doesn’t know.

If you are someone who travels a lot in Indian railways, like me, you will have definitely noticed that after the bus fare hike in Kerala, there has been an unusual increase in the number of people travelling by train. This is because the cost incurred on travelling by bus is much higher than the cost on train travel. For example, if you want to travel from Kozhikode to Thiruvananthapuram in a KSRTC bus, then you have to give a fare of Rs.271, whereas it is only Rs.100 in a train. To understand that travelling by train is a more sensible option than using the KSRTC service, you don’t need any Economics knowledge, but only need a very little economic common sense.

The government says that the hike in the bus fares is to accommodate the increase in fuel prices and it is the only way I which they can reduce the burden on KSRTC. But with the increase in bus fare the number of people using the service got reduced, but the number of service remains the same. With this there will be a decline in the revenue, but the expenditure will remain the same resulting in an increased loss.

Now, what is our eminent economist-Finance Minister doing? Has he forgot his basics in Economics, or is he feigning blind and deaf to this situation, or is it so that he has no say in this decision taken by the KSRTC and it’s Minister with the acknowledgement of the Cabinet?

The increase in bus fares is helping only the Indian railways, whose income is going to increase manifold with this decision of the Kerala government. What KSRTC has to do is to decrease the bus fare so that there is at least one incentive for the travellers to use its service – reduced fare. Otherwise why should a common traveller use the service of KSRTC, what incentive he or she has to use it? Is there any great comfort in travelling in any of the debilitated KSRTC buses, especially through the pathetic roads of Kerala or is there any guarantee on the punctuality of the bus service?

The economics behind the logical option of reduced bus fares to increase the profitability of KSRTC is pretty simple. With a decrease in bus fares, more number of people would use the KSRTC service and with that there would be economies of scale for each individual bus service. In the long run, the average cost of operation for each individual service will get reduced, which in turn will add up to the reduced cost of operation of the entire KSRTC bus fleet. So there is the double advantage of increased revenue from increased number of travellers and reduced long run average cost (LRAC) of operation or reduced expenditure. Increase in revenue and decrease in expenditure, certainly means increased profit or reduction in loss.

The only way out for the KSRTC to reduce their loss is by a reduction in the fares and by increasing the number of travellers. It would also be a big relief for the large number of people who have no other option but to depend on the bus services of KSRTC for their travel. The earlier Mr. Thomas Issac recognise this simple idea, the better for KSRTC and for all travellers, like me, who expect to travel in a train with reduced rush and some minimum level of comfort.