Draft Discussion Paper on Integrated Transport Policy

5.1 Broad estimates of investment requirement till 2010 indicate that it will be necessary to increase annual investment levels to three to four times the present level in real terms. The financing of investment on this scale is a massive task. It will require a substantial increase in budgetary support to the sector, but recognising the scarcity of budget resources the bulk of the effort to meet the additional investment requirement has to come through generation of resources within the sector itself. The pricing of transport and user charges will therefore have to play a much larger role than in the past.

5.2 Pricing in the transport sector should conform closely to the cost of services and actual resources used in its production, having regard to scarcity values of these inputs. Subsidies in transport will have to be limited to those areas their retention on societal considerations is overwhelmingly justified. Wherever subsidies are retained, they must be made as explicit as possible so that they are clearly identifiable to ensure transparency. The instruments of pricing, taxation and subsidy should be used to achieve the following desired socio-economic objectives:

Develop an economically rational inter-modal mix.
Promote efficiency in operation and generate adequate resources for sustaining growth.

It is necessary that all the social costs must be taken into account in pricing transport services preferably through fiscal measures. While pricing should be cost-based, the policy of improving productivity should be relentlessly pursued.

5.3 It will be necessary to bring about major changes in our rail tariff policy in the light of the above objectives. Some subsidisation of rail tariff is unavoidable in our situation. However, the extent of subsidisation must be limited to where it is absolutely unavoidable. Large scale cross subsidisation of passenger services by overcharging certain categories of freight is not justifiable as it deflects freight traffic which should be carried by the railways to road thus preventing the railways from performing according to their comparative advantage. An improvement in the fare freight ratio (earning per passenger km. vis-à-vis earning per tonne km.)from the present level of 0.32, which is one of the lowest in the world, to 0.5 as it was in 1951/52, would result in additional earnings of Rs. 4400 crore. There are also limits to cross subsidisation within the passenger category. Reluctance to impose passenger tariffs which cover costs only prevents the railways from mobilising the resources needed to modernise and upgrade the quality of their services which is increasingly important for passengers.

5.4 The road transport services in most cases do not cover all the costs particularly the infrastructure and external costs. In order to have optimal inter-modal mix it is necessary to incorporate these costs into transport pricing. In Civil Aviation, the cost of infrastructure should also be taken into account while pricing transport services.

5.5 The bulk of resources for financing the development of the transport sector should come from generation of internal resources and borrowings or through private sector participation. In sectors traditionally funded by the States such as roads, it is essential to explore innovative avenues for mobilisation of resources. The levy of tolls on roads where tolling is possible would provide an additional, albeit, limited source of funding. It is, therefore, necessary to implement indirect user charges in the form of a cess on petrol and diesel, which are the principal funds used in the transport sector, the proceeds to be earmarked for the development of roads. Unless this is done it will not be possible to finance the massive investments needed in the road sector.

5.6 The possibility of sharing the cost of provision of transport facilities needs to be explored. As regards rural roads, apart from the fund earmarked as a part of the Basic Minimum Services and various rural employment programmes, beneficiary participation should be utilised as a supplementary funding source. Efforts should be made to organise communities and mobilise people’s contribution to rural development. State Governments may also consider introducing special schemes like Market Committee Fund Scheme which is already working satisfactorily in Punjab, Haryana and Rajasthan. The funds so collected could supplement Plan resources for the construction of rural roads. In order to augment availability of resources for the sector the budgetary resources should be used to leverage private investment. These measures will be particularly required for improving the viability of the projects both relating to creation of transport infrastructure as well as for operation of services.