Pricing fines for ticketless travel

In large mass transit systems such as those in Mumbai (or even Chennai), ticket checking turnstiles can significantly slow the flow of human traffic. The sheer number of passengers that use these transit systems daily makes it impossible to check the ticket of each and every traveler. Hence, the Railways, rather than checking the tickets of every passenger, instead relies on random checks. During these random ticket checking efforts, people traveling without a ticket are asked to pay a fine. This, the Railways hope, will be deterrent enough for people to purchase tickets before travel.

However, rather than ensuring deterrence, what this system has resulted is in an informal “ticketless travel insurance” economy. The concept is simple – rather than buying a ticket from the official ticket counter, you instead buy protection from an “informal insurance provider”. For a nominal “premium” (believed to be in the range of Rs. 100 per month) these providers insure you against ticketless travel. In other words, in case you get caught by the ticket checkers during the course of your “insurance”, these “insurance providers” step in to pay your fine! Check out this article in The Hindu about how these insurance providers work (WARNING: The link isn’t working too well for me, and is taking me to a third party site a few seconds after loading The Hindu page, so be careful before clicking through).

The very existence of this market, however, implies that fines for ticket less travel are not being priced properly. The math is fairly simple: if the price of the ticket is p and the probability of your ticket getting checked is frac {1}{N} , then the fine for ticketless travel should be strictly greater than Np. If not, it works out cheaper for your to pay the fine each time you are caught rather than buying the ticket.

So what role is being played by these “informal insurance companies”? Risk management! People don’t like risk. While on an average your ticket might be checked only once in 30 days (number pulled out of thin air), there is no reason that you will not be pulled up for ticket less travel multiple times in a month. By outsourcing the risk to a central party who pools the risks (from several commuters), you have a steady cash out flow and are hedged against getting caught multiple times (you might get caught but your insurer pays the fine). In fact, this is how insurance works in other sectors also.

What should the Indian Railways do to drive these “informal insurance companies” out of business? Currently, if the fine is S, S le Np. From this equation, you can see that the Railways can do one of three things so that this inequality gets reversed – the price of a ticket can be reduced – but that would be equivalent to cutting off the nose to spite the face, for it would have significant adverse impact on the railways’ revenues. Next, N can be reduced, or in other words the frequency of surveillance be increased. This, too, is not easily implementable since the Railways will have to invest in additional resources to check tickets. The last option is to increase S, and there is nothing that prevents the railways from doing this!

How will this work, though? By raising the cost of fines for ticketless travel while keeping the frequency of ticket checking constant, the “premium” a commuter will have to pay to these insurance companies will increase. If the fine amount is increased to a certain level, the premium a commuter will have to pay to buy ticketless travel insurance will exceed the price of buying tickets! And the insurance market will implode.

While this seems like a simple solution in theory, I’m not confident of it being implemented any time soon. Who knows – one might have to go to the Union cabinet to increase the level of fines in local trains. That’s how our railways is structured.

Indigo’s Food Policy

My last few flights on Indigo Airlines have not been pleasant, at least from a food perspective. It is said about the airline that they put a great amount of thought into each of their processes, but while it might have been working earlier (I used to positively prefer Indigo’s food experience a while back) of late it doesn’t seem to be doing too well.

Firstly, I don’t have a problem with the food itself. I most definitely prefer Indigo’s cold sandwiches and Real Activ fruit juice to the reheated omelette/pulao that Jet Airways serves. It is much lighter on the stomach and feels healthier, and doesn’t give you that usual bad aftertaste of “airline food”. I also understand that it makes sense from the company’s perspective, since the lack of hot food reduces their cost of serving it and also makes the plane easier to clean.

The problem, however, is with the process. Firstly, Indigo has these “corporate program customers” (I’ve never understood how to get into one of these), whose meal is pre-paid. So you have stewardesses walking around with printouts to know who is eligible for a free meal. I’ve also noticed some kind of priority in terms of service – that the corporate program customers are served before others (which is logical, since they’ve already paid), which disrupts the flow.

Then there is the problem of cash management. For whatever reasons the price points are not in multiples of 50 (sandwiches cost Rs. 170, fruit juice Rs. 70), so change management (!!) is a huge problem. While they have credit card machines they don’t work uniformly, and end up causing further delays.

The biggest issue, however, is the choice! For probably good reason Indigo serves a variety of meals, enough variety that the menu runs up to a full page in their in flight “retail therapy magazine”. There are two problems that result from this – firstly, there is a problem of inventory. When you offer so much choice, how much of each type do you carry? I know there must be some science going into how many packets of ready-to-make Uppit they carry and how many chicken sandwiches. However, on days when I’m (unfortunately from a food perspective) seated in the vicinity of Row 14 or Row 30, it is reasonably unlikely that I don’t end up getting my preferred choice.

The second problem with the variety in food is the time lost in decision-making. “Give me a chicken sandwich. Oh, it isn’t there? Then give me biryani! Oh, but that’s a Ramen kind of thing? No I don’t want that. Give me cashew nuts. Not pepper flavour, give me chilli”. The amount of time it takes for a passenger on Indigo to decide on what to eat is significantly more than the corresponding time it takes for a passenger in a so-called full-service carrier (veg/non-veg). Again, it doesn’t help (from this perspective), that an Indigo flight operates with four stewards, as opposed to six in a “full-service” carrier of the same size.

Overall, it makes the entire process of ordering for, paying and getting a meal rather unpleasant for significant proportions of passengers. My solution to this would be two-fold. Firstly, include the cost of the meal in every ticket. The current cost of an Indigo meal is Rs. 240 (170 for sandwich, 70 for juice). With economies of scale (everyone ordering a meal) I’m sure this can be brought down to about Rs. 200. When I’m paying Rs. 5000 for a flight, I wouldn’t mind the extra Rs. 200. I may not eat (note that half the time I fly Jet I don’t eat), but the point here is that given the brand Indigo has built I may not change my decision on flying Indigo because it costs Rs. 200 more.

The second idea is to drastically reduce the choice. Yes,  I know that might end up pissing off some customers who have their own favourites from the Indigo menu (mine is spinach-corn-cheese sandwich) but it makes the logistics much easier to handle. Imagine having just two choices of sandwich and two choices of juice (and no more, maybe less) and you think of how much quicker the service will get then. Going even more drastic is also an option (this is something Jetlite used to do in 2008, and I’ve noticed the same with Turkish Airline’s low-cost brand Anadolujet). Give absolutely no choice and just deposit one sandwich and one can of juice on every single tray-table. They could even.

The point of this post is that uncertainty hurts, and sometimes even those that it is intended to benefit. The choice in the Indigo menu is meant to be a boon for the passengers, but it has significant costs attached – in terms of availability and timeliness.

PS: There are no good food stalls in the airport terminal (Mumbai 1B) also that one can peacefully carry on to flights. Last two times I carried muffins from Cafe Coffee Day and Cafeccino respectively and both were downright horrible. I miss Delhi’s terminal 1D and the double chocolate chip muffin at the Costa there.

Minimum Support Prices

In India, we have this concept of “Minimum Support Price” for agricultural commodities. It is basically an unlimited put option written by the Government in order to protect farmers against not getting “appropriate remuneration” for their produce. In that sense it can be thought of as an implicit subsidy towards agriculture. There is merit in the argument in favour of such a measure – agriculture is a fundamentally high risk business and in the absence of such safety nets, not enough people might take the risk to sow a particular crop, leading to shortages.

On the other hand, it can be distortionary too. If the MSP is set too high, it can lead to a glut in that particular crop in that year, at the cost of other crops, leading to shortages in the latter. Hence, it is a tool that is necessary but one that should be used with care.

Now, the MSP has to be set in advance – so the MSP for the 2013-14 season has already been set.  This is again a risky move but a necessary move – farmers need to know the minimum amount they can get for each crop before they make their sowing decision.

Source: Commision for Agricultural Costs and Prices
Source: Commission for Agricultural Costs and Prices

The figure on shows the Compounded Annual Growth Rate (CAGR) in the MSP of a few important agricultural commodities between 2007-08 and 2013-14. Notice that the CAGR is lowest for crops such as wheat or rice, and high for crops such as Tur Dal or Moong Dal. Under the current Public Distribution System (PDS), families below the poverty line get rice and wheat at subsidized rates, but not pulses. Note that I’m only mentioning facts and not trying to suggest any causation here.

Interestingly, the MSP for coarse grains such as Ragi and Bajra has also grown significantly faster than that of rice or wheat. Also note that prices of cotton and jute have grown rather slowly over the period of consideration.

Now, while this tells us by how much prices have changed in the last six years, it is also pertinent to see how the prices have changed – did the price rise consistently over the last 5-6 years or were there some discontinuities? The next figure tries to address this issue.

Source: Commision for Agricultural Costs and Prices
Source: Commission for Agricultural Costs and Prices

The figure on the left here charts the actual year by year growth in the Minimum Support price of the crops under consideration. To me, two things jump out from this graph – apart from sugarcane, there was a steep increase in the minimum support prices of all commodities between 2007-8 and 2008-9. You might want to be reminded that India went to polls in the summer of 2009 and Maharashtra, a prime sugarcane growing state, went to polls in the winter of the same year. Again, I don’t want to claim any causation.

Then, from 2009 to 2012, minimum support prices of these commodities remained largely constant – perhaps compensating for the large jump from 2008 to 09? And then again there was a spike from 2012 to 2013. There is no such jump from 2013 to 2014, though. Note that the nation goes to the polls in 2014.

Tur and Moong dal, however, have seen a rather secular increase in prices in the last five-six years.

How the proposed Food Security Bill will affect the MSP is left as an exercise to the reader. Comments are open.

PS: Data that I’ve used for this post is available at the website of the Commission for Agricultural Costs and Prices.