Rail Travel vs Income Growth In India

What 50 years of Railways passenger data shows - and what it doesn't.

Railway passengers in India peaked in FY13 - but haven’t returned to that level since. Air travel, meanwhile, has steadily grown.

That divergence says something about income growth in India.

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The Thirty-Second Takeaway

• The India consumption story assumes broad-based income growth across classes

• Across countries, travel tends to grow as incomes rise

• As India’s largest mode of travel, Railway passenger traffic offers a useful proxy for income growth

• However, historical trends show little evidence of upward mobility between Railway fare segments

• Instead, over the last ~15 years, income growth in India seems to have deepened rather than widened - with gains accruing more to existing middle and upper classes

• This has implications for how consumer brands think about growth
  

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The idea that India’s consumption is deepening rather than widening has also been explored in the Indus Valley Annual Report 2025 by Blume Ventures, using trends for categories like cars, housing and smartphones. This post examines the same pattern through a different lens: 50 years of railway passenger data.

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Travel And The Human Condition

As a species, we have an innate drive to seek out new lands - one which led us to migrate out of Africa on foot, circumnavigate the globe on sailing ships, and plant a flag on the moon.

Human history is defined by exploration - so it’s not surprising that across countries, data shows a strong correlation between income growth and tourism - rising per-capita incomes lead to growth in both domestic and international travel.

An Oft-Quoted Chart

You’ve likely seen this before. Originally from a 2019 World Economic Forum report, this became one of the most widely-used charts on the India consumption story - featuring in consulting reports, investor decks and policy documents.

This suggests that over 2005 to 2018, a large number of Indian households moved into higher income segments - creating 45M new upper-middle income households. This is expected to continue, with another 100M households entering this segment by 2030 - boosting consumption growth.

So far, so promising. I’ve been in at least one meeting where this chart was presented with a confident proclamation on the India growth story, resulting in much head-nodding.

But this rests on two key assumptions: a) Sustained real GDP growth of 7.5%; and more importantly, b) broad-based income growth across classes. And over the last few years, I’ve increasingly wondered how robust the second assumption is.

While time will tell if the 2030 projection plays out, we can look back at the past to see if historical indicators support the 2005-18 story.

Railway Travel As A Revealed Preference

I recently came across a handbook of Indian Railways statistics from FY1971 to FY2013, and by combining this with Railways annual reports from FY2013 onwards, I arrive at a dataset spanning 50 years of Railway passenger trends.

Railways is the largest mode of travel in India - with a peak of nearly 4Bn non-suburban trips in FY13. Given the strong correlation between income growth and travel, this makes Railway passenger trends a useful proxy for historical income growth in India - as revealed by observed travel trends.

The Big Picture - 50 Years Of Long-Distance Railway Travel

(A quick note - all the Rail passenger figures shown below are for Non-Suburban passengers, i.e. excluding suburban or intra-city trips - since those reflect local commutes and not discretionary travel. Also, all Rail and Air passenger counts represent non-unique passengers, i.e. the total number of trips, not the number of unique travellers.)

Let’s start with the most zoomed-out view we have - annual long-distance Rail passengers, from 1970-71 to 2026-27 budget estimates.

Stagnant Rail capacity over FY71-91 resulted in a passenger traffic CAGR of only 1.4%. This accelerated after liberalisation, with capacity expansion and economic development resulting in a higher CAGR of 4.2%.

But curiously, after reaching a peak of nearly 4B passengers in FY13, long-distance Rail passengers declined over the next 6 years, to reach 3.7B in FY19. And with a projected total of 3.5B in FY27, this means that Rail passengers are below both their pre-Covid level and their FY13 peak.

In contrast, domestic Air passengers overtook their pre-Covid level in FY24, and are at an all-time high.

What could explain this divergence?

The Hierarchy Of Railways Passengers In India

A quick explainer before we move on. There are 3 major types of Railway passenger tickets in India - which are, in ascending order of price:

1. 2nd Class: Unreserved - buy a ticket, board any general compartment, find sitting or standing space. India’s cheapest mode of long-distance motorised travel.

2. Sleeper Class: Reserved - you book a specific berth on a specific train. Features 3-tier berths with no air-conditioning or bedding, but you upgrade from anonymous travel to a ticket with your name on it. The first step up on the income growth ladder.

3. AC Class(es): All the other ticket types; from AC 3-tier and AC Chair Car to more luxurious variants. Reserved seats with air conditioning, bedding and curtains. The entry point to India’s middle class.

Alright, back to our question - what explains the divergence between Rail and Air passenger trends?

2nd Class Passengers: Unreserved, But Not Unimpacted

The breakup of Railway passengers by these classes, from FY12 to FY27b (latest Railway budget estimates), shows a striking trend.

The decline from FY13 till date is driven by 2nd Class, which lost over 700M passengers, dropping from 3.5B in FY13 to 2.8B in FY27b - far outweighing the gains in AC Classes and Sleeper.

Drilling down further, the breakup between 2nd Class Ordinary (slower trains which stop at all stations, lowest fare) and 2nd Class Mail & Express (faster trains, halting at fewer stations, slightly higher fare) shows an even more stark picture.

For total 2nd Class passengers - the decline between FY13-FY19, and the subsequent FY27b gap vs FY19, are both driven by 2nd Class Ordinary passengers.

And if we look at what drove this:

• As per The Hindu Centre for Politics and Public Policy, there were price hikes in Railway fares over FY13 to FY15 - which is likely what drove the FY13-19 drop

• In 2020, the Railway Ministry converted over 500 2nd Class trains from Ordinary to Express. As a result, the minimum ticket price on these trains went up from Rs. 10 to Rs. 30 - which seems to have driven the post-Covid drop

In FY23 (the first post-Covid year), 2nd Class Mail & Express passengers were +185M vs FY19, while 2nd Class Ordinary passengers were -1,337M. While some people who could afford higher fares moved up to Express trains, there was clearly massive demand destruction, from people who stopped travelling altogether.

This was partly reversed in late FY24, when the government converted 140 trains back to 2nd Class Ordinary - and hence we see that 2nd Class Ordinary passenger numbers grew faster after this.

This shows that at the bottom of the pyramid, demand is extremely price-sensitive - even small increases in ticket prices lead to people travelling less, rather than spending more.

Sleeper Class Passengers - Growing At A Somnolent Pace

Sleeper Class passengers grew at a moderate CAGR of +2.2% over FY13-19 - but have stagnated after that.

From 353M in FY18 to a budget estimate of 358M in FY27b - Sleeper passengers have been flat over the past 9 years.

In comparison, AC Class passengers showed accelerating momentum, from a CAGR of +6.1% over FY13-19 to +9.9% over FY19-27b - but let’s drill down deeper into this.

AC Class Passengers - On The Fast Track (So Far)

Growth in AC Class passengers (the fastest-growing segment from FY13 till date) has been led by AC 3-tier (a.k.a. 3AC, the workhorse of middle-class long-distance travel in India) and AC Chair Car (which accelerated over the last few years with the introduction of Vande Bharat Express trains).

AC 3-tier, the largest AC segment, looks like a strong growth story - but this hides a few nuances.

The Race Between Land & Air

Air passengers seem to have grown slower than AC 3-tier after Covid, in contrast to the pre-Covid trend.

However, this ignores one important detail - domestic flights have been consistently operating at near-full capacity (as measured by PLF, or Passenger Load Factor), over the past decade.

This implies that supply and not demand is the constraining factor for domestic air passengers, at present.

In contrast, for AC 3-tier, while demand and supply grew in sync over FY13-19 - after FY20, supply has outgrown demand. Seats grew by 303% over FY13-25, vs passenger growth of 235% - resulting in a fall in average annual trips / seat.

With AC 3-tier being one of the few profitable ticket classes - it’s not surprising that Railways would invest in expanding its capacity.

However, 3AC demand growth doesn’t seem to have kept pace with expansion in capacity, after Covid.

The Express Train Slows Down

Also, in FY26, AC 3-tier passengers declined vs PY, for the first time in a non-Covid year. They were also 27% lower than than the Rail Budget estimate for the year - and the Budget estimate for FY27b is flat vs FY26.

Even accounting for shifts to Vande Bharat or air travel, this suggests that growth in this segment could be plateauing.

The Cost Of 1 Level Up

The difference in fares between 2nd Class Ordinary, 2nd Class Mail & Express, Sleeper Class and AC 3-tier may seem small in absolute terms - but fares increase by roughly 2X at every level.

This is the price of progress - for a traveller to upgrade 1 level, their incomes need to have grown enough for them to spend twice the amount they were spending earlier on a train ticket.

Putting It All Together

Okay - so what does 50 years of passenger data actually tell us?

First, there is high price elasticity at the bottom of the pyramid. Any hike in 2nd Class ticket fares leads to an immediate drop in passengers. This doesn’t suggest upward movement from 2nd Class to Sleeper - this is more indicative of a population that can’t afford to spend any more than they already are.

Second, with Sleeper Class passengers flat over the past 9 years, not only does there not seem to be movement from 2nd Class to Sleeper, there also doesn’t seem to be much (if any) movement from Sleeper to AC Classes.

This suggests that the strong growth in AC Class passengers has come mostly from within the existing middle class itself, rather than from people moving up the income ladder from lower classes.

Third, while AC 3-tier passenger growth had a strong run, it seems to be tapering off now. If this is on account of shifts to Vande Bharat or air travel, then Sleeper passengers aren’t moving up to fill the gap. And if this is because existing 3AC passengers are travelling less - that would suggest that their discretionary spends are under pressure.

Last, domestic air passenger growth is holding steady, with all available capacity being utilised - even though air fares have been higher over the last few years than they were before Covid. So evidently this segment of consumers isn’t feeling pressured on their spends.

All this suggests that over the past ~15 years, income growth has deepened rather than widened in India.

The benefits of economic development seem to have accrued more to existing middle and upper classes, rather than driving broad-based income growth.

Implications For Consumer Brands

These patterns seem to be echoed in consumption trends.

For FMCG brands selling to 2nd / Sleeper Class travellers - small packs at price points of Rs. 1 / 2 / 5 / 10 (LUPs) are essential. I’ve written about this earlier - packs priced at Rs. 5 and 10 account for over half of FMCG volumes in India. Over 80% of shampoo volume is sold in sachets. Prataap Snacks and Balaji Wafers built and scaled businesses on 5- and 10-rupee packs.

Parle has been India’s most chosen FMCG brand for 13 years in a row. Also, the price of a small packet of Parle-G biscuits remained unchanged at Rs. 4 for 17 years, from 1994 to 2021 - and has stayed constant at Rs. 5 since then. These two facts are not unrelated.

Observed trends for 2nd / Sleeper Class passengers and FMCG sales point to the same thing - for this cohort, incomes don’t seem to have grown enough to enable meaningful upgrades in consumption.

Brands selling to consumers who travel in AC Class have likely seen strong growth over the past ~15 years. However, they may be seeing a slowdown now - as suggested by multi-year trends for hatchbacks and smartphones.

And finally, brands selling to consumers who travel by air are likely seeing sustained and robust demand - though they might reach a plateau on household penetration after a point, given the small size of this consumer cohort.

Which brings us to an important question:

What Does This Imply For Future Consumption Growth?

The WEF household income growth projections make for a compelling consumption growth story, led by 100M new middle class households by 2030.

But what if income growth in India continues to deepen rather than widen? If per-capita GDP grows more through existing upper-class households becoming richer than through new households climbing the income ladder, what does that imply for how consumer brands can drive scale and growth?

Rising Tides vs Navigation

If we don’t end up seeing a rising tide lifting all boats, then growth becomes more about navigation than momentum.

Even if income distribution stays unchanged, pockets of growth will continue to emerge - in specific segments, unmet consumer needs, and structurally advantaged categories.

So if broad-based income growth takes longer than expected - growth may need to be led by identifying white spaces where the right to win and profitable routes to market intersect.

Here’s one example to illustrate how specific segments can move in the opposite direction to a larger trend:

For FY26, estimated Railway passenger numbers across major AC segments - 1AC, 2AC, 3AC and Chair Car - are all lower than the budget estimates, especially for 3AC. However, 1st Class passengers in Non-AC trains are 40% higher than expected.

(These are tickets for legacy 1st Class coaches on metre gauge & narrow gauge lines, mostly serving hilly regions or heritage routes)

While low in absolute terms (3M in FY26e), this was the only class above 2nd and Sleeper to overshoot estimates.

This is small in scale, but illustrative in principle - even in the midst of broader declines, pockets of growth can often be found.