Small is Efficient: A Frontier Approach to Cost Inefficiencies in Indian State Road Transport Undertakings

This paper attempts to measure cost-inefficiency of nine major Indian State Road Transport Undertakings (STU) for the period 1983-84 to 1996-97 in a manner that allows this inefficiency to vary both across time as well as across STUs. We found that given the size distribution of the STUs and relevant measures of their working conditions, the potential for reduction in cost inefficiency is very high. Further, there is evidence of wide disparity among STUs' inefficiency levels, through out the sample period. On an average smaller STUs appear to be more efficient than their larger counterparts in Indian bus transport industry. By and large, there has been stability in the cost-inefficiency ranks across STUs. The average cost curve is U-shaped, i.e., economies of scale are present up to a certain level of production and the diseconomies of scale set in. A policy that aims to change the size distribution of the STUs will help in increasing the efficiency of the Indian bus transport industry.