India Raises Rail Fares as Modi Looks to Improve Public Finances

India raised railway passenger and freight fares to boost revenue a week after Prime Minister Narendra Modi 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 today. The previous government had announced the steps on May 16 before deferring implementation the same day, saying the changes are the prerogative of the next administration.

Nomura Holdings Inc. and KR Choksey Shares & Securities Ltd. said the measures will improve railway profitability while adding 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.”

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.

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 decided to link tariffs with fuel prices for the first time in February 2013.

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 today’s statement.

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