Mumbai is an economic universe unto itself, at once India's richest city and its thriftiest; in some senses, it is also India's most financially sophisticated, in others its most obdurate. Over the last two weeks, it has presented a fascinating case study for students of behavioral economics to contemplate.
The occasion: Fares on the city's creaking and overworked suburban rail system -- often called the lifeline of the city, recording an astounding 7.5 million journeys a day -- were set to be raised steeply, effective June 25, after being held flat for many years by an elaborate system of subsidies.
The announcement came as part of a planned nationwide hike of 14 percent in train fares as the new government delivered the first of the "bitter pills" it has said will be required in the short run to stanch years of financial losses and to build infrastructure, including a high-speed rail system. (A previous railways minister was booted out of office in 2012 by his own party for raising fares; even after the increase, passenger fares on Indian Railways continue to be cross-subsidized by its freight operations.)
However, protests against the increase were strongest in Mumbai, the only Indian city other than New Delhi (which has a new, efficient underground metro) where citizens are used to taking the train every day. Further, the hikes affected Mumbai's citizens disproportionately, even if they themselves have long benefited from subsidies. That's because the railway board also decided to use a new formula to calculate the price of monthly, quarterly and yearly "season passes," which a majority of the city's commuters use to avoid standing in long lines for tickets. Previously, a monthly pass between two destinations on the network cost the equivalent of 15 single journeys; it suddenly would cost the equivalent of 30 trips, more or less doubling the price in one go.
This was, in retrospect, a strategic mistake. Not even the most rational economic agent can finesse the thought of paying double for a service that was enjoyed (or, in Mumbai's case, suffered) at a stable price for many years.
Consumers react much more strongly to a sudden increase in the price of a good or service than to a series of small increases. They also react much more strongly to a price rise that they are forced to contemplate frequently -- as daily commuters must do -- than to one they can soon forget. Even further, consumers react particularly strongly and unitedly to price rises that generate a strong "concert-hall effect." Mumbai commuters typically spend one to two hours a day on the trains, during which they discuss the burning issues of the day -- in this case, the rise in rail fares.
The protests of Mumbai's commuters were widely broadcast by the city's tabloids, which are the best in the country and display the same enterprising mind-set of the Mumbaikar. Mid-day offered some advice on June 23: Any yearly passes bought before June 25 would honor the pre-hike price for a whole year. "A Churchgate-Dahanu or Kasara-CST yearly first-class pass will cost you Rs 18,792 if you get it by tomorrow," the paper advised. "Come Thursday, however, and the same pass will cost you Rs 41,688 or Rs 23,000 more (enough to buy an AC or a fancy smartphone)."
Even as thousands of people were lining up to defend themselves against the fare hikes by buying long-term passes at the old rate, the newly elected officials of Mumbai were petitioning the railways minister in Delhi to roll back the hike. After all, they suddenly had a few million constituents sarcastically repeating back to them their battle cry in the recent elections of "achche din aane waale hain" ("better days are coming").
Crucially, the state of Maharashtra (of which Mumbai is the capital) will hold elections in October -- elections in which the ruling coalition in New Delhi hopes to wrest power from the ruling party in the state, which was now agitated strongly against the hike.
Mumbai had its way. On June 24, a day before the fare hike was to go into effect, the central government reduced the increase in the price of season passes in Mumbai to a more acceptable 14 percent from 100 percent, scrapping the hike in short-distance single fares altogether.
So after having first treated commuters purely as consumers and arguing that that they should pay something close to the cost price of a service, the government learned about the adverse consequences of commuters responding negatively not as economic agents -- that is, by abandoning use of the service -- but as voters. The size and collective power of Mumbai's commuting class mean that the Mumbai suburban network, India's rail hotspot, will also continue to remain what one official called "the problem child" of the Indian railway system.
Lesson No. 2: Governments are made up of people, too, and are also subject to the quirks of behavioral economics. That's why the "bitter pill" arguments on economics by political actors rarely translate into action when they gain power. Good economics needs good strategy to help build new consensuses.
Oh, and an announcement. The (slightly chastened) new government of India now invites intelligent proposals from behavioral economists on how to sugarcoat, stagger or smuggle through rollbacks on subsidies on agriculture, aviation, power, petrol -- and economic good sense.
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