The government’s anti-inflation strategy got another leg-up with railway minister Lalu Prasad on Monday announcing a round of cuts in freight rates for petroleum products and some key manufacturing inputs.
The freight rates for petrol, diesel and ammonia were cut by about 5%, while the rate cut for steel, cement, iron ore and limestone was 6%.
“These will have a beneficial impact on price stability,” said finance minister P. Chidambaram on the move to cut freight rates.
Inflation had alarmingly climbed to 6.73% for the week ended 3 February, the highest in over two years.
Commodities such as petroleum products, ammonia, steel and cement will be cheaper to transport through the railways next fiscal.
The main aim of Indian railways in cutting rates is to boost volumes; the spin-off is “that it will help in checking inflation,” said a railway board official at a post-budget press conference.
Oil companies, however, pointed out that the cut in freight would not translate into lower retail prices of petrol and diesel.
Instead, it would help oil marketing companies offset under-recovery (the retail price of petrol and diesel are lower than the cost of refining and marketing).
“We spend about Rs750 crore on transportation of petrol and diesel by railways. A 5% cut in freight cost on the two fuels will help us save about Rs37 crore a year, which will definitely erase a part of our under-recoveries,” S.V. Narasimhan, director-finance at India’s largest refiner Indian Oil Corporation (IOC), said.
Even if the oil companies do not pass on the benefits of lower freight tariffs, the rate cuts on movement of cement and steel could translate into lower prices for the end consumer.
The Central government’s department of industrial policy had recently identified cement and steel as two sectors where a price rise could translate into costlier inputs for a number of downstream industries.
The government feared that this would translate into a round of price increase for manufactured products.
The freight rate cuts on steel and cement could be significant as the budget has also cut freight rate of limestone and iron ore inputs for cement and steel manufacturing, respectively.
The freight rate for limestone and iron ore has been cut by 6%.