Causal effect between financial viability and service quality in Indian public transport: Evidence from a Dumitrescu-Hurlin panel causality test

Abstract

This study explores the causal relationship between financial sustainability and service quality in India's public bus transport sector, focusing on State Transport Undertakings (STUs). Addressing a critical gap in transport economics literature, this research is among the first to empirically examine whether financial viability drives service quality or vice versa. A novel service quality index is constructed using Principal Component Analysis (PCA), incorporating four key operational indicators: service regularity, vehicle breakdowns, punctuality, and accident rates.

To ensure methodological robustness, the analysis applies both traditional (first-generation) and advanced (second-generation) panel unit root tests, followed by the Pedroni cointegration test and the Dumitrescu-Hurlin panel causality test. The findings reveal a unidirectional causal effect: profitability significantly influences service quality, while the reverse does not hold. This outcome suggests that financial stability is a precondition for improving service delivery in public transport systems.

The study offers actionable insights for transport authorities, recommending strategic priorities such as operational savings, optimal route design, cost control, and fare rationalization. By combining a context-specific quality index with advanced panel econometric techniques, this research contributes novel empirical evidence to a largely understudied but policy-relevant issue in developing economies.