Rail fares hiked as Narendra Modi rolls out tough decisions4 min read . Updated: 20 Jun 2014, 11:33 PM IST
BJP-led govt approves hikes put on hold by UPA; analysts say slight inflationary impact seen in near term
New Delhi: In power for less than a month, the Bharatiya Janata Party (BJP)-led government on Friday raised railway passenger fares and freight rates in a move that’s in line with Prime Minister Narendra Modi’s warning of tough decisions to improve the nation’s financial health, but risks upsetting consumers and stoking inflation.
State-run Indian Railways increased passenger fares by 14.3% and freight rates by 6.5% with effect from 25 June. D. V. Sadananda Gowda, the new railway minister, approved the hike that was put on hold by the previous United Progressive Alliance (UPA) government on 16 May, the day election results showed the BJP-led National Democratic Alliance (NDA) had unseated the UPA.
Both Modi and finance minister Arun Jaitley have warned that tough measures are necessary to improve government finances and lift economic growth that slumped to sub-5% levels in the past two financial years.
“It’s necessary to take steps to improve financial discipline and improve the economic health of the country," Modi said on 14 June in a speech in Goa. “I know my popularity might go down due to these hard decisions, people might be annoyed with me, but they will appreciate it later."
In the short term, the increase in passenger fares and freight rates, which precedes the presentation of the Union budget next month, risks fuelling inflation and burdening households as companies pass on higher transport costs to consumers by raising prices.
Inflation measured by the Wholesale Price Index (WPI) accelerated 6.01% in May, the quickest pace since December. Consumer price index-based (CPI-based) inflation slowed to 8.28% in the month from 8.59% in April, but it is still far above the comfort zone of the Reserve Bank of India, and there are concerns that the sharp escalation in the Iraq civil war will further stoke oil prices.
Japanese securities house Nomura said in a research note that the railway fare hikes will add slightly to inflation in the near term.
“The rise in passenger fares will add around 10 basis points to CPI inflation, while there will be a limited indirect impact on the CPI from the freight hike. WPI inflation is likely to see a marginally larger impact as the cost of transporting goods such as coal, cement, oil, steel and food grains will rise. However, the hikes will improve the profitability of the railways and hence they are a move in the right direction," it said.
One basis point is one-hundredth of a percentage point.
The UPA government increased passenger fares across the board for the first time in 10 years effective 21 January 2013. It also introduced a fuel adjustment component (FAC) in railway fares as a reform measure in the railway budget it presented on 26 February 2013. Since the adoption of FAC, which indexes rates to the price of fuel, railway fares for passengers and freight have seen six-monthly revisions.
The passenger fare hike announced on Friday, applicable across all classes, was made up of a flat 10% increase in fares and 4.2% increase in FAC.
Freight rates saw a flat 5% upward revision with 1.4% added on account of an increase in FAC for all major commodities.
Additionally, the railways withdrew a concession on short lead freight traffic (for short distances) upto 100 km while increasing the minimum distance for charge from 100km to 125 km.
“The passenger fare increase over last 7-8 years has not even covered up for the inflationary increase in expenditure," said Abhaya Agarwal, a partner at EY Llp who oversees the infrastructure practice at the consultancy previously known as Ernst and Young.
“There is an accumulated deficit of the past years which was only partially offset by fare increase last year. So I would call this hike modest given the investments required in railways for improving passenger amenities and safety. On the freight front, the railways cannot hold on to fare increase until the operational costs come down, which can only happen through upgradation of infrastructure and capacity," Agarwal added.
The UPA government had announced the same level of hike in railway fares on 16 May, the day the Lok Sabha election results were announced. The timing was criticized, prompting then railway minister Mallikarjun Kharge to withdraw the decision and the railway ministry to put up a notification saying the hike had been put on hold “till further advice for placing this proposal before the new government for taking a view/decision in the matter".
In a statement on Friday, the railway ministry said “meeting the annual expenditure would not be possible unless the revised rates as finalized by previous government is implemented, hence order of withdrawing implementation of revised fare and freight has been withdrawn".
On Friday, the Congress criticized the increase and sought its rollback despite having endorsed it when it was in power at the head of the UPA.
Ajay Maken, Congress general secretary and head of its media department, said the “gift" by the Modi government would put an additional burden on the middle class, lower middle class and the poor. “As an opposition party, we demand an immediate rollback of this hike. Never before in history, has there been such a huge hike," he said.
In the interim budget presented on 12 February, the railway ministry painted a bleak picture of the network’s financial health. Railways’ operating ratio, which is a measure of its operating cost as a percentage of revenue, was seen touching 90.8% against a target of 87.8% in the year ended March.
The railways missed its earnings target for the fiscal year ended March on the back of a ₹ 5,000 crore decline in passenger earnings, further lowering the plan outlay to ₹ 59,359 crore from ₹ 63,363 crore in the fiscal year 2013-14. Passenger losses accounted for ₹ 26,000 crore in the fiscal year ended March 2014.