In the 1950s, the rail mode occupied a dominant position in transport within India. Since then, however, the transport sector in the country has been characterized by a secular decline in the share of rail mode. Internalization of the external costs of transport may not be sufficient for the achievement of a socially optimal modal split unless account is taken of the factors behind the current modal split. This paper attempts an investigation of these issues on the basis of data relating to eight representative sections in the country where the two modes are in competition. India became a decidedly road-dominant economy in the beginning of the eighties with the railways losing out in respect of freight traffic in addition to its already declining share in passenger traffic. The dominance of road