Railway Rates and Indian Industrial Development

Railway Rates and Indian

Industrial Development

India is, geographically and in size, a great continent. It has a regular coastline almost innocent of natural harbors, and there are few navigable waterways. The Himalayas girdle the North, the deserts of Baluchistan and the fearsome passes of the Khyber isolate us in the North- west, as the impenetrable mountain forests and swamps of the Assam border do in the North-east. For all practical purposes, the external trade of this vast continent has to seek its passage in concentrated form through the ports of Karachi, Bombay, Madras, Calcutta and Chittagong. The main lines of movement of traffic are of necessity to and from the ports, and the internal trade of the country follows the main impulse. Therefore the industries and the agriculture of India depend to a very large degree on the economy and efficiency of transport by rail.

There are other distinguishing features characteristic of the Indian rates problem. The great markets of trade in India are again concentrated at ports and there are comparatively few great centers of internal distribution, the ‘jobbing centers’ as the Americans call them. Ahmedabad and Cawnpore are important industrial centers; but their rise is due to the growth of industries more than to their being centers for the breaking of bulk and for internal distribution of commodities. A good test to distinguish a market for distribution is to enquire to what extent the retail dealer draws his supplies from his own city. Does the Cawnpore retail dealer draw his stock of imported articles from the wholesale dealer in Cawnpore or in Calcutta? If he generally, and in the majority of cases, draws it from the Cawnpore wholesale dealer, then Cawnpore is a market certainly, but if he depends on Calcutta generally for his supplies, then Calcutta is the distributing market and not Cawnpore. Judged this way, there is an extra-ordinarily small number of real ‘jobbing centers’ in India. This is an important feature of Indian trade and commerce.

STREAMER FRIEGHTS

The main stream of India's foreign trade is towards and from London. This city claims to be the greatest market of the world, and the world's prices are determined there for the more important articles of commerce. The Indian prices are therefore derived from the London prices either by adding or by subtracting, amongst other costs, that of sea-freight. In other words, competitive prices, whether for raw materials or for manufactured products, are intimately affected by the sea-freight. An example will make this simple point even more obvious. We manufacture or mine in India an enormous quantity of salt; still Bengal consumes millions of pounds of Cheshire salt transported 4,000 miles across the seas and there is no table-salt industry in India. Foreign salt holds the Calcutta market principally for the reason that it is cheaper by a very large margin to carry salt from Liverpool to Calcutta by sea than from Tuticorin or Sambhar by rail. This is an instance of an imported finished article. The same is the case with an exported raw material like cotton. The prices of cotton at Bombay are roughly the London prices minus freight and other charges, and the prices at the producing centers, whether in the Punjab or in the Central Provinces, are in their turn the Bombay prices minus the freight and other charges. From these examples, it will be apparent that the Indian problem of rail freights is intimately mixed up with sea-freights to London.

RAIL FREIGHTS

Rail and sea-freights play an important part in the determination of prices, but it is well to appreciate that the proportion they bear to other elements of cost is generally small in the case of almost all but bulky cheap articles. This has frequently led to its being argued that railway freights do not constitute either an important or a serious problem which Indian industries have to face. It is pointed out how the mere seasonal fluctuations in prices cover a range, in comparison with which freights lapse into insignificance. That middlemen's commissions and Managing Agents' charges find a more prominent place in the bill of costs is also true. Buying ‘futures’ and speculative purchase quite common in several trades are instanced to show that freight rates do not enter into the picture, and the conclusion is drawn that Indian trade and industry are not in any great degree influenced by the freight rates as such. This is a plausible argument which has such a great semblance of truth that it is very often convincing. The lacuna in the argument consists in imagining that our object is to discover whether high freights constitute the most important of the handicaps from which Indian industries are suffering. We are not doing that. We only wish to enquire whether the existing freight bill might, by being too high, be one of the contributory causes.

RAIL FREIGHTS AND FOREIGN TRADE

With these simple facts in mind, we can go a step further and visualise the freight map of India. From the point of view of foreign trade, London is practically equidistant from any of the five ports of India, which however are separated from each other by very long distances. Imported goods sell at practically the same price in these markets and these are the most important markets. The immediate result of this position is a great limitation of the markets of the Indian industrialist. Let us suppose that a Cotton Mill in Bombay can hold its own against the imported article, as regards prices in and about Bombay. Its products cannot compete with the imported article in Calcutta or Karachi, owing to the extra rail freight that has to be borne by the indigenous article. Now, let us take a factory in the interior, say at Allahabad. Owing to the absence of large markets in the interior of the country, it has of necessity to reach the great markets at the ports. In other words, the railway freight to the ports becomes an important consideration. The products of the factory can enter the market only of that port that is nearest to it. And there is the severe handicap that, if the factory happens to be on the margin of production, it can have no other market. Let us consider the case of a glass factory, situated for our purposes at Mughal Sarai. Let us grant it has all the advantages of location etc., for its raw materials, that it is well and efficiently run, that it is the only glass factory in India and that it can sell its products at a fair profit at Calcutta. It cannot sell its products at anything like a fair profit in any other market for the simple reason that, while all the other markets are at greater distances for the indigenous article, they are all practically at the same distance for the imported article. This species of handicap can be removed only in one way-viz: a suitable railway freight system for India.

Passing now to the exports of raw materials, the position is somewhat similar. We have seen already how the market cost of raw material at the producing point is the market cost at the port minus the freight to the nearest port. Thus as the distance from the port increases, the market cost diminishes until it may well be below the cost of production i. e., it would not pay to raise corps for export. Could a freight system be devised to help the Indian agriculturist out of this dilemma?

RAILWAY FREIGHTS AND INTERNAL TRADE

We have so far considered the influence of freights on the foreign trade. Is the position with regard to the internal trade of the country very different? Let us begin with the villages. The village shopkeeper draws his stocks of grains, pulses and seeds from his own or the neighbouring villages. For his supply of matches, kerosene oil, soap and other such articles which are not produced in the village itself, he depends for his supplies on the nearest town or weekly fair. The scale of his operations is so small, and his credit so poor, that he can rarely expect to have any dealings with a wholesale merchant. The shop-keepers of mofussil towns are also retail dealers mostly, and they draw their supplies from other retail merchants of the nearest place of production. Here, as before, the dependence on the port is to be noted.

THE INDIAN RATES SYSTEM

Bearing these peculiarities of the Indian continent in mind, we may now examine how for the existing general rates structure is designed to relieve these disadvantages and assist in the marketing and the distribution of commodities. All goods in India are classified into ten or eleven classes and each class has a minimum and maximum rate per mile attached to it, within which railway administrations are free to fix the rates. Most of the rates are themselves on an equal mileage basis, i.e., they vary in direct proportion to the distance traveled. In the large majority of cases, the rate applied is the maximum of the class to which the article belongs. To this rate, which represents the charge to be made for the conveyance of the goods, is added another charge known as the ‘terminal’ to cover the cost of handling the goods at either end and of the expenditure incurred on the maintenance and repair of the station accommodation provided for the purpose. There are a few cases in which the charges are made, not on the equal mileage basis described above, but on what is known as a ‘telescopic’ basis. There is a certain rate per mile quoted for the first few 100 miles, a smaller

rate per mile for the next 150 or 200 miles, and a still smaller rate for the rest of the distance. The longer the distance traveled, the cheaper will be the rate per mile. These telescopic or ‘schedule rates’ as they are called, are with one important exception applied only on the distance covered on each railway administration and do not apply on the continuous mileage in through traffic. Wherever a commodity for which telescopic rates are quoted travels on more than one line of railway, each line works up the rate for its own distance and the total of these rates is the total rate. These telescopic rates are generally applicable to bulky raw material and not to manufactured goods. In addition to these equal mileage and telescopic methods of charging rates, there are quoted what are known as special or station-to-station rates, which do not give any indication of the basis of charge and are in fact lump sum rates given in view of special conditions.

INDIAN AND AMERICAN

RATES SYSTEMS CONTRASTED

It will not be wrong to say that the Indian rate system is generally an equal mileage rate system, and that owing to the telescopic rates being inapplicable on the continuous mileage, the quotation of these latter rates does not greatly affect the position. The result of this arrangement is that there is a strict limitation placed over the distances which commodities can move. Under an equal mileage or even a telescopic rate, the freight mounts up in proportion to the distance traversed and distances are soon reached beyond which it will no longer be economical to transport a particular commodity. An example will make the point clear. Let us suppose that the cost of production of a particular commodity at Lahore is Rs. 5 per unit and that the market price of that commodity is Rs. 10. Then if the freight per unit is 1/2 pie per unit per mile, the maximum range of market for the commodity will on an equal mileage basis be 640 miles. In other words, it would be impossible to sell the product in the Calcutta market which is more than 1,000 miles away. This is the defect of any system which ignores the fundamental principle of the value of service and the defects of such a system will be more apparent in a country of long distances like India than in a country of short distances as England. It is very instructive in this connection to see how the Americans, whose problems of distances are somewhat similar to ours, have tackled their railway rates question. They recognise fully that in the case of every commodity there is a limiting freight more than which it cannot possibly bear. This has led to the blanketing of rates beyond a certain distance differing for each article. When the maximum freight the commodity can bear is reached as between a station ‘A’ and station ‘B’, the freight charged on that commodity from the station ‘A’ to any other station, however further from ‘A’ than ‘B’, is the same. This leads to a wide extension of markets with great beneficial effects in the fostering of industries and the distribution of wealth. There are no equal mileage or telescopic rates in America. The mileage is always a subsidiary consideration. The only question asked is at what rate will traffic move freely from one point to the other. All American rates are thus special rates. Under what is known as ‘a short and long haul clause’ it is illegal except under certain special circumstances to charge a higher rate for a shorter than for a longer distance if the former lies within the latter. This provision as well as the one prohibiting personal, local and commodity discrimination, has made it possible for the trader and the industrialist to obtain the very largest measure of advantage from railway transport.

FORM AND PLACE VALUES

The production or preparation of commodities for final consumption, Prof. Ripley says, falls naturally into two distinct parts; the creation of form value, succeeded by the conferring of place value. Transportation is concerned alone with the latter process. Of these two operations, the latter, the creation of place values, is by far the more elastic and adaptable process. The grower, the miner or the manufacturer, has his first costs more or less rigidly fixed by natural or human conditions; such as the fertility of the soil, the grade of ore, the prevailing scale of wages, and so on. His proximity to the status of a marginal producer depends upon his relative position in these respects. With the carrier, matters are more contingent. Including within its reach, as it does, many grades of producers and consumers, each more or less rigidly held bound by his own circumstances and conditions, as above said, the carrier is able to exercise a wide range of choice in fixing that margin of value created which it reserves for itself. And at all times, by reason of its subjection to the law of increasing returns, this intermediate share of the carrier tends to adjust or accommodate itself to the end that it may discover or produce a wider margin between values in the hands of producer and consumer respectively. This may be best accomplished by a progressive widening of its field of activities, that is to say, by an enlargement of its physical reach and scope. It is always striving to lower the cost of production made by the marginal producer. Its motto must ever be to get more business, if not right at home, by search for it abroad–and this always with the chance that the greater the possible margin of place value remaining as its individual share. In Ripley's argument we find the real scientific explanation for the apparent rejection of distance as a factor in modern rate-making. With a rapid increase in the speed and security of transport, distance is annihilated and geographical disadvantages are neutralised, with the result that more and more distant markets enter into the field of competition and begin to exert an increasing influence on the adjustment of rates. This should not be understood as it has been very often, to mean that the distance principle is no longer a reliable guide for the purpose of fixing rates; on the other hand, it is the ground plan of every rates structure, the ‘elevation’ of which latter is however determined by the economic forces of competition as profoundly modified by the law of increasing returns. It cannot well be otherwise so long as distance continues to be an important factor in the cost of service, and considerations of the cost of service influence the quotation of rates. Wherever there is an absolute disregard of distance, as say in the case of postal or telegraph or radio rates, the distance over which the service is rendered is a very insignificant element amongst those contributing to the cost of service, and is almost lost sight of. It is conceivable, say by harnessing the atom into service or by some similar scientific feat, that the cost of transportation by railway may be made virtually independent of the distance traversed; but until such a desirable consummation is effected, railway rates and charges will continue to be based upon a distance principle.

NOT MERE IMITATION

The methods, such as they are, which have been adopted in India for the fixation of rates differ very considerably from those which are characteristic of American railway rates. Economists are never tired of reiterating that despite the history, of frauds and swindles so intimately connected with American railway construction and operation, the American railway rates system has, by its progressive and adventurous character, contributed very largely to the prosperity of that land of millionaires. Indian railways may very usefully follow the American example in several important directions, such as in making the rates conform more to the economic principles of the cost and value of service, and in maintaining that relativity of rates between raw materials and finished products as would prevent a high premium being placed as at present on the export of raw material and the import of manufactured goods. Imitation should not however be carried too far, as the elasticity of the American rates system suffers from several disadvantages, chief amongst which may be mentioned the voluminous and complex nature of the tariffs that have to be prepared and used. The elasticity of rates, in so far as it postulates sudden fluctuations from time to time to meet changing commercial or trade conditions, promotes economic unrest in the sense that it prevents long time contracts being entered into by traders. It enables the railways to sacrifice the interests of the traders to their own, when so necessary, and to divert traffic into uneconomical channels. Flexibility of freight rates should not be brought about by the wholesale sacrifice of all stability nor allowed to lead to superfluous transportation, consequent upon the upsetting of business from other carriers or markets. The undue development of special commodity rates is not an unmixed blessing, as such special rates are in a sense subsidised by the ordinary class rates applicable to the smaller places which bear the brunt of the fixed charges. Momentous social consequences may result. Not only the cost of doing business, but the expense of living in the smaller places is increased. One of the most dangerous social tendencies at the present time is the enormous concentration of population and wealth in great cities. Increased efficiency and economy in production are much to be desired; but social and political stability must not be sacrificed thereto. Is it not possible that a powerful decentralizing influence may be exerted by checking this indiscriminate and often wasteful long-distance competition, through greater insistence upon the rights of geographical location?

THE LINES OF REFORM

With the aid of a more progressive, if somewhat more adventurous rates system, it should be possible to build up in the interior of the country a large number of markets of wholesale trade which will act as centers of distribution and offset the ill-effects of the concentration of wealth and bargaining power at the ports. Such a multiplication of markets will greatly encourage the internal distribution of traffic and, by limiting the number of middlemen, be of real benefit to the public. By maintaining a judicious differential between the rates for raw materials and finished products, for wagons and for smalls, and by recognising that the markets for articles of commerce could be largely widened only by the quotation of rates based on the acceptance of the principle of the flat zone rate beyond a certain limiting distance, distinct for each commodity, it should be possible to give a good fillip to indigenous industries and afford them a chance to face competition even with the natural handicaps of want of experience and limited knowledge. The period of travail will doubtless depend in the end upon the efficiency and economy of the Indian entrepreneur, but a great impetus would have been given to his somewhat infantile efforts, in the absence of which, the overpowering nature of external competition might have left him helpless.