Tuesday, 9 October 2012

Future of India Post – Rural Dimension
            - Harinder Singh
            India has the largest Postal network in the world with 1,55,618 Post Offices at the end of the financial year i.e. 31.3.2003 including 1,39,081 Post Offices in rural areas.  At the time of independence, India had 23,344 Post Offices, which were largely confined to urban areas and selected villages.  During the last 50 years it has grown almost seven times.  On an average, a post office serves an area of 21.13 sq. km & population of 6,602. At the time when the Indian Postal Department was set up, only telegraph facilities were available in limited areas since 1851 and the first Telephone Exchange was set up in Shimla as late as 1914 with the result that till the first quarter of 20th century the Postal Department was the only means of communication.  All other means of communication other than telephones which are existing at present like fax, internet, email etc. have only developed during the last few years.
2.             With such a large network the question invariably is whether such a large network is beneficial to the  common man or not.  If the postal system enables to ensure optimal utilization of its infrastructure then it can be said that the network justifies itself, but if the utilization is low then there is a case for having a re-look at the existing infrastructure particularly in the rural sector.  An analysis of the various policy initiatives undertaken during the past five year plans would reveal that the postal planning was based on a number of assumptions which have not fulfilled expectations as there is a difference between the market demand and our policy assumptions as the following table will show:

Sl. No.
Policy Assumptions
Whenever a post office is established, it contributes to the development of the area. 
The reality is that economic development leads to demand for postal service and not the other  way round. The Postal Services network were to a certain extent mandatory  in the early years of the 20th century but as time passes and rural sector gets linked up to electronic means of communication including telephone land lines, importance of development of postal network is continuing to decline except in some remote, hilly and tribal areas.  Otherwise, development of roads, telephones and local market to encourage movement of agricultural products has become more important.
If  any post office is set up then over a period of time its traffic increases till the post office becomes a profit-earning center.
As Savoor Committee and Talwar Committee reports would reveal, a large number of post offices have been opened particularly in the rural sector without adequate justification and they have not contributed to the increase in traffic with the result that the traffic has been static in the large number of rural areas.
If the State Governments are asked to contribute to the cost of the post office, then the part of the cost will be recovered. 
NRC has been paid by some State Governments only as first installment and thereafter most State Governments have not paid for NRC thereby contributing the losses.
As rural post offices are opened, the cost per post office is minimal and remains static over a period of time. 
The reality is that since DA and other allowances are being revised continuously the cost per post office continues to grow even if there is no increase in traffic.

Post office has a Universal Service Obligation(USO) and therefore, the Govt. is duty bound to open post offices wherever they are required.
The extent to which this Universal Service Obligation of the nation can be met depends on the health of the economy and the priorities and one should remember that there is no such thing as free lunch and somebody has to foot the bill for this USO.  
As number of post offices increase economies of scale starts working to the advantage of the post office.
Economies of scales work only when the traffic is increasing faster than the cost involved but as the traffic is static or declining the economies of scales will not work.
There are over 6 lakh villages and it is important to provide cheap and efficient service to all the villages. 
When many existing Branch Post Offices(BOs) do not have any traffic, it can be presumed  with certain exceptions that the traffic will not be adequate to justify opening of more B.Os. 
3.            There is no doubt that the post office has enormous capacity and capability to provide services because of its unique position but the problems have arisen due to over blown infrastructure over the years which has not taken into account the cost involved and the extent to which these costs can be met.  During a survey conducted in 1973, it was noticed that 9 out of 11 Branch Post Offices were opened on the basis of questionable data, which was only to enable opening of unviable post offices.  This problem was compounded by the fact that during the period starting from III five-year plan, targets were laid down and there was pressure on Postal Circles to open post offices even when many of them were not viable.  In the 70s, invariably the targets were received by the Circles in the last quarter of the financial year and therefore, a number of post offices were opened in great haste ignoring the economic viability.  This is not to suggest that the infrastructure created is of no use but it is relevant to have a re-look and  to emphasize on the quality of infrastructure created with a view to ensure that optimal results are obtained.  This is not very difficult if only we take into account the reality of the situation. 
4.            It needs also to be emphasized that no social purpose will be served by opening post offices, which do not generate any worthwhile work.  Even if there is no increase in the cost, the cost of operations goes up by 8% per annum as DA on Salary and Pension has to be paid to the working employees and pensioners as the case may be.  There are two ways of approaching this problem; one is to cut down the cost of operations and the other is to increase the volume of transaction provided, the business generated is economically profitable.  Though down sizing offers a real opportunity to cut down the cost, the fixed cost cannot be reduced as fixed costs account for 90% of the expenditure including cost of salary, pension, diesel/electricity and rent and other establishment matters.  In India, the Department of Posts has no control over the cost of infrastructure as bulk of the cost comes from the Pay Commission recommendations and there are well established interrelations with other Departments in this regard.  Therefore, the possibility of savings on salary and pension is very limited particularly after 5th Pay Commission which has increased the cost of operations fairly substantially after 1996.  This has resulted in the Department being out-priced by the private couriers who pay between 1/3rd to 1/4th the salary of an average Postal Assistant or Postman for courier work.  On the other hand, generating traffic is also challenging because of monopoly culture and mindset prevailing for several years in the Department.  It will take years to develop a truly competitive culture as we are still being guided by earlier monopoly culture even when our monopoly is there only on paper.  Therefore, there are very real problems both in marketing postal products and also in affecting savings through down sizing.  Ultimately, both the approaches will have to be adopted but in addition to the above the criteria for opening of post offices would have to be revised substantially in accordance with the post office traffic.  The only workable criteria appears to go by cost and strictly by the work load (minus time spent on Sub Accounts in the parent office which will not exist if the post office itself is closed down.)  The other two criteria namely distance and the population are of hypothetical interest only because if the relevant rural area does not generate any traffic what so ever then the population and distance are not material. It is pertinent to mention here that   the Indian Post Office Act 1898 confers monopoly on the post office for letter posts, but if letter posts itself is running into a loss then it is unlikely that the post office can earn profit.  Hence it is essential that the pricing of the products should be such that it should generate profit as having a monopoly if at all, in a losing product is of no economic use. 
5.            Therefore, it needs to be emphasized that laws of economics/marketing are asserting themselves over legal monopoly of Post Office created through an Act of Parliament.  All delivery systems are now being controlled by the market and it is difficult to identify any delivery system where monopoly has not been eroded through market forces.  One can say, that there is complete monopoly of the State in regard to printing of currency notes but it is also true that this monopoly has also been eroded by credit cards and ATMs which reduce need for printing currency as economies are heading towards cashless transactions. 
6.            There are therefore, two alternatives in dealing with the existing situation.  The first alternative is to increase rural traffic although this may also lead to increased loss to the Department as discussed above and also because a perusal of Table 15 of Annual Report 2003-04 of the Department would reveal that the average revenue earned by the Department in respect of post card, letter cards, letters, money orders and speed post are less than the cost involved.  Therefore, an increase in the traffic may actually end up in increased loss for the Department.  The second alternative is to have an understanding with the Ministry of Finance regarding the extent of subsidy to be given to the Department as a whole and there after the Department may be allowed free hand to manage its postal operations in such a way that the Department is not able to exceed subsidy promised.  This may involve either closure of non remunerative post offices or increase in rates of postal products or out sourcing postal services in rural areas.  Para 3.2 of the Annual Report 2003-04 of the Department indicates that Panchayat Sanchar Seva Kendras are useful for retailing some basic services like sale of stamps and postal stationery.  In this, the cost involved is much less than normal postal system.  If Ministry of Finance agrees to this arrangement then the extent of loss agreed upon can be treated as subsidy for a specific period as social obligation towards the nation.  This is all the more important as there is no single product – existing or  proposed, which can wipe out the loss sustained by the Department to the extent of about 1500 crores per annum given the reality that the cost per employee goes up to the extent of around 8% per annum as DA even when there is a decline in postal traffic. 
7.            The Department has completed 150 years of its existence and at the time when Postal Department was created it served a very powerful purpose in ensuring linking all villages, towns and cities.  The traditions, conventions and the initiatives taken by the Department so far would make any Department proud but it needs to be remembered that the past is no guide to the future keeping in view the rapid changes in technology, organizational functions and labour costs involved.  Therefore, the Department has to draw upon its proud traditions but at the same time it would require radical changes in working environment and traditions because the world of 2004 is very different of the world of 1854.  The fact that the old organizations like Tatas and Indian Army have been able to draw upon good management practices from the past while developing new initiatives, give hopes to the Department of Posts to try for a fresh organizational approach. 
8.            A question which is invariably asked is about what will be the shape and size of India Posts in the year 2025. Notwithstanding some bold predictions, it will be very difficult to predict future of any Department dealing with  communication as similar predictions have not bourn fruit in the past.  Since the pace of technology and availability of cheap technology like mobile phones, email and money transfer facilities is so fast, it is difficult to make, any such prediction.  However, as the country entered into development of rural economy which has pumped in huge money with richer and middle class farmers, there is a likelihood of increased expenditure on fast moving consumer goods which may indirectly make an impact on the prosperity of the post offices.  The extent to which such prosperity  will be affected by such increased expenditure is difficult to predict.  Further, the recent experiences have show that there is an enormous scope for Rural PLI, Savings Bank and Savings Certificates in the enforceable future although the extent of share of rural post will be influenced by the level of competition. We have seen one Cooperative Bank fail after another but the public confidence in India Post remains intact and if we are able to improve the quality of services offered by India Post in rural areas then the gap between revenue expenditure and cost involved will decline substantially. 
9.            In conclusion,  it can be said that the ability of India Post to compete in the rural segment will depend on the extent with which such new initiatives are pursued with more intensive use of infrastructure.  The decline of the conventional letter mail is a known phenomena.  This trend is not confined to India Post alone, but other similarly placed countries also face similar challenges. However, innovative restructuring, right sizing along with new initiatives may reduce the extent of financial loss and that is the bottom line all of us have to aim at. 

SOURCE : http://www.indiapost.gov.in/PSCIB/


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