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BW Businessworld

A Tough Decision For Tough Times

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Prime Minister Narendra Modi clearly means business. It looks like tough times are starting. Less than a week after he talked of tough decisions to put the Indian economy back on track, the action has begun with the railways. Union railway minister Sadananda Gowda hiked passenger fares by 14.62 per cent across all categories and freight tariffs by 6.47 per cent, which shall be effective June 25. The hike should help the Indian Railways raise Rs 8,000 crore in a year.

Essentially, it is a flat 10 per cent hike for passengers and 5 per cent for freight. The variable Fuel Adjustment Component (FAC) approved in last year’s rail budget accounts for the balance 4.2 per cent in passenger fares and 1.47 per cent in freight. The FAC was introduced in October 2013 by the UPA government. Under this, the railways introduced a fuel charge on passenger fares which led to a 2 per cent increase under the FAC in higher classes and around 3.5 per cent in lower classes. Similarly freight rates were increased by 1.7 per cent under the FAC.

While the hike in prices will definitely hit consumer budgets (especially monthly suburban users) it will provide the railways with some leeway to provide better services. Already political leaders including Jayalalithaa have started the campaign for reversing the hike. Modi should not agree to any such demands.

That’s because the railways needs funds for modernisation. Currently, the railways’ needs Rs 4.5 lakh crore to complete existing projects. During April-May 2014, the Indian Railways reported an increase of 7.05 per cent in revenues at Rs.16,405.26 crore by ferrying 180.63 million tonnes of commodities. During the same period last year, the railways carried 171.84 million tonnes freight generating Rs.15,324.25 crore.

This is quite likely the first step towards re-invigorating the railways. While this hike is not enough, the Modi government is expected to allow FDI in the railways primarily to bring in the latest technology to run high-speed trains across the country. That fits into the BJP manifesto that talked of building a Diamond Quadrilateral (a high speed railway grid connecting the major cities).

Interestingly, the rail fare hike has come in a few days before the Railway Budget is presented in Parliament. However, this could well be an indication of how things are likely to change in the future. For starters, there is no reason to continue with a railway budget, a legacy from the Raj. Then the government will not need a railway budget to be presented to Parliament. It can link fares to a basket of fuel prices. As diesel and electricity rates rise, it could pass it on to consumers dynamically.

What, however, is needed, is to expedite the building of the freight corridors (Delhi-Mumbai and Amritsar-Howrah). The time is ripe to cleanse the railways of being a tool to cater to the whims of successive railway ministers. This could well be the first step in that direction.