June 21 (Bloomberg) -- India raised railway passenger and freight fares, giving Prime Minister Narendra Modi room to cut subsidies after he said he’s ready to take unpopular steps to improve fiscal health in Asia’s third-largest economy.
Passenger fares will rise by 14.2 percent and freight by 6.5 percent effective June 25, the Railway Ministry said in a statement yesterday. The previous government had announced the steps on May 16 before deferring implementation the same day, saying changes are the prerogative of the next administration.
Nomura Holdings Inc. and KR Choksey Shares & Securities Ltd. said the measures will improve railway profitability and add only “slightly” to inflation. While fare increases are a politically sensitive issue in a nation where about 70 percent of the population lives on less than $2 a day, Modi has vowed fiscal discipline as he looks to stave off a credit rating downgrade and revive economic growth from near a decade low.
“It’s a smart move as higher revenue receipts can be used for railway expansion and repairing of balance sheets,” Deven Choksey, managing director at KR Choksey brokerage in Mumbai, said by phone. “Fares had to be increased due to the rise in fuel prices, coal and diesel. The move will not affect the economy much.”
Add to Inflation
The passenger fare increase will add about 10 basis points to consumer price inflation, while there will be a “limited indirect impact” from the freight rate revision, according to Nomura. Consumer prices rose 8.28 percent in May from a year earlier, government data show.
The survival of Indian Railways depends on users paying for the services they avail, Finance Minister Arun Jaitley said today on his Facebook page. The railway minister has taken “a difficult but a correct decision,” he said.
Indian Railways has a workforce of 1.54 million people, according to its website, and about 23 million people ride Asia’s oldest network each day. The company will earn about 80 billion rupees from the fare increases, giving the government room to cut subsidies on passenger tariffs that have increased to 260 billion rupees a year, JPMorgan Chase & Co. predicts.
The previous government forecast the fiscal shortfall will narrow to 4.1 percent of gross domestic product in the year through March 2015 from 4.5 percent in the preceding 12 months. Modi’s administration is due to present its budget next month.
“Meeting the annual expenditure would not be possible unless” fares are raised, the ministry said in yesterday’s statement.
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