Indian Rail Links Freight Rate to Fuel Price to Cut Loss

Indian Railways, Asia’s oldest network, plans to link passenger and freight tariffs with fuel prices for the first time as it seeks to cut more than $4.5 billion of losses stemming from below-cost fares.

Charges for shipping commodities on the network will be linked to fuel prices starting April 1, Rail Minister Pawan Kumar Bansal said today in New Delhi while announcing the operator’s annual budget. Passenger fares will be tied to fuel costs after approval from parliament, Vinay Mittal, chairman of Railway Board, said without giving a timeline.

The world’s third-largest network is working to reduce losses as it seeks an investment of 14 trillion rupees ($259 billion) by 2020 to upgrade and expand facilities. Bansal’s measure underscores the government’s resolve to rein in the budget deficit by paring subsidies that add to losses at state-owned companies.

“The fuel-linked freight increase is a good move,” said Sonal Varma, an economist at Nomura Holdings Inc in Mumbai. “That will over time minimize their losses.”

Linking freight tariff to fuel prices will lead to an average increase of 5 percent in rates, Bansal said. The carrier may revise the charges twice a year in line with changes in fuel costs, Railway Board’s Mittal said.

Diesel Prices

Prime Minister Manmohan Singh’s government last month allowed state-owned refiners to raise diesel prices on their own every month till the deficit from below-cost sales is wiped out. The government orders Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. to sell diesel, kerosene and cooking gas below cost to help curb inflation.

“Railways’ finances need to be rationally insulated,” Bansal said in parliament. “To this end, a mechanism to neutralize the impact of fuel prices on operating expenses is required to be put in place.”

Finance Minister Palaniappan Chidambaram, due to unveil the federal government budget on Feb. 28, has vowed to narrow the budget shortfall even as economic growth falters and an election due by May 2014 adds pressure to boost spending to win the support of voters.

Chidambaram’s goal is a shortfall of 4.8 percent of gross domestic product in 2013-2014, from an estimated 5.3 percent this year, as he seeks to avert a rating downgrade. Standard & Poor’s and Fitch Ratings have cut their outlooks for India’s debt rating to negative, and S&P said in December the nation faces “at least” a one-in-three likelihood of a downgrade.

Subsidized Services

The railways, which carries 23 million travelers every day, will lose 246 billion rupees in the year ending March 31 from subsidized passenger services, Bansal said today. The operator left passenger fares unchanged following an increase last month.

Share prices of companies that cater to the railways plunged in Mumbai trading. Kalindee Rail Nirman (Engineers) Ltd. sank 11 percent, the most in 15 months, to 70.4 rupees at close of trading. Texmaco Rail & Engineering Ltd. also lost 11 percent while Titagarh Wagons Ltd. fell 8 percent.

The state-owned network will borrow 151 billion rupees in the year starting April 1, almost the same amount it aims to raise this fiscal year. Railways plans to spend 634 billion rupees next year, Bansal said.

Dollar Bond

The yield spread on Indian Railways’s 2017 dollar bond over Treasuries narrowed by six basis points to 196, according to data compiled by Bloomberg.

The carrier’s revenue will rise to 1.44 trillion rupees in the year starting April 1, compared with a revised target of 1.26 trillion rupees this year. The increase in passenger fares last month will add 66 billion rupees in annual revenue.

The railways will add 500 kilometers (311 miles) of new tracks next fiscal year, the minister said. India has added an average 180 kilometers of railroads every year since gaining independence in 1947, according to the rail ministry.

The nation currently has about 65,000 kilometers of track network. By comparison, China plans to expand its network to 120,000 kilometers from 91,000 kilometers in the five years ending 2015.

Indian Railways said in 2009 that it plans to carry 50 percent of the nation’s inland freight by 2020 from 35 percent. To reach this goal, it plans to add 25,000 kilometers of track, increase train speeds, triple procurement of four-wheeled cargo wagons and build locomotive factories.