India will raise railway passenger fares for the first time in eight years, snapping a populist trend to help mend the finances of a creaking network that is a bottleneck for growth in Asia's third-largest economy.

The railway budget, released on Wednesday, precedes the union budget, to be presented in parliament by Finance Minister Pranab Mukherjee on Friday, which is expected to push fiscal deficit reduction amid slowing economic growth and high inflation.

Passenger fares were last raised before the Congress party won its first term in office in 2004. The refusal by successive ministers to raise fares has strained the ministry's finances, which in turn has sapped the amount of money available to lay new track and modernise services.

Clogged freight lines, slow delivery times and overcrowded ports have dented Indian companies' competitiveness and slowed the pace at which crucial commodities such as coal are transported -- aggravating India's power shortages.

"Indian railways are passing through a difficult phase," Railway Minister Dinesh Trivedi told parliament.

"If we do not strengthen Indian railways, I'm afraid we weaken our country," he added, in a speech that was littered with poetry and occasionally interrupted by jeers and laughter.

Subsidies Vs Investment

Successive railway ministers have belonged to powerful regional allies of the ruling party in New Delhi, who have tended to subsidise passenger fares at the expense of freight traffic, making goods transport expensive and slow.

Many Indians still see the railways as a service for the "aam aadmi", or "common man", ferrying often-poor migrants left largely outside of two decades of surging growth that have seen millions of Indian buy cars or travel by air for the first time.

Trivedi is a senior politician in the Trinamool Congress Party, which governs West Bengal under chief minister Mamata Banerjee. The party last year blocked one of Prime Minister Manmohan Singh's biggest reforms: to open the Indian supermarket sector to foreign retailers such as Wal-Mart Stores Inc.

"The price hike is a big concession to the market forces and it goes against Mamata Banerjee's strident refusal to hike fares," said political analyst Amulya Ganguli.

Earlier this month, the government raised rail freight rates by nearly 20 per cent.

The railway ministry plans to borrow Rs 500 billion from the market through the Indian Railway Finance Corporation (IRFC) in the 2012/13 fiscal year, Trivedi said.

India plans to add 700 kilometres of new rail lines to its network in the fiscal year starting in April, Trivedi said.

Trivedi also said India planned to invest $147 billion in the railways during the next five-year plan period that runs from 2012 to 2017.

India's railway network is one of the world's largest, but years of low investment and populist policies have crimped growth and hindered private investment in a sector seen as crucial to the country's economic expansion.

"We need to have a system that delivers," Trivedi said.

Ahead of the budget, business leaders were crying out for the government to improve the railway network, more than 80 per cent of which was built before India's independence from Britain in 1947, and is plagued by delays and overcrowding.

Investors have called for the government to open up the railways more to private investment, such as by allowing private operators to run trains and bid to build new infrastructure such as stations and logistics parks.

But the railway ministry has proved reluctant to open up to private investors. Eye-catching projects, most notably the building of Dedicated Freight Corridors (DFC) to speed up goods travel, have been slowed by land acquisition disputes.

From 1990 to 2007, which parallels India's economic rise, the country built 960 km of tracks compared with China's 20,000 km over the same period.

Despite Prime Minister Singh's push to revamp the country's infrastructure, with a $1 trillion splurge planned between 2012-17, the railways can still appear a law unto themselves, with their own budget, schools, hospitals and residential colonies to house some of their 1.4 million employees.

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