India to link fares to fuel costs

Indian Railways, Asia's oldest network, plans to link passengers' fares and freight rates with fuel prices for the first time as it seeks to cut losses stemming from below-cost tariffs.

Commuters at Church Gate railway station in Mumbai. India will invest 14 trillion rupees by 2020 to expand and modernise its rail facilities. Rafiq Maqbool / AP Photo

Indian Railways, Asia's oldest network, plans to link passengers' fares and freight rates with fuel prices for the first time as it seeks to cut more than US$4.5 billion (Dh16.5bn) of losses stemming from below-cost tariffs.

Charges for shipping commodities on the network will be linked to fuel prices starting on April 1, Pawan Kumar Bansal, the Indian railway minister, said in parliament in New Delhi yesterday while announcing the operator's annual budget.

He did not give a time frame for tying passenger fares to fuel prices.

The plan will help to boost earnings for the world's third-largest network, which is targeting an investment of 14 trillion rupees (Dh954.5 billion) by 2020 to expand and modernise its facilities. Mr 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 in Mumbai. "That will over time minimise their losses."

Linking freight tariff to fuel prices will lead to an average increase of 5 per cent in rates, Mr Bansal said. 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.

P Chidambaram, the finance minister who is scheduled to unveil the federal government budget tomorrow, 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. Mr Chidambaram's goal is a shortfall of 4.8 per cent of GDP in 2013-2014, from an estimated 5.3 per cent this year. The railway, which carry 23 million travellers every day, will lose 246bn rupees in the year ending March 31 from subsidised passenger services, Mr Bansal said. The operator left passenger fares unchanged following an increase last month.

Share prices of companies that cater to the railway reacted negatively to the announcement. Kalindee Rail Nirman (Engineers) sank 8.7 per cent to 72.35 rupees, bound for a five-month low. Texmaco Rail & Engineering lost 7.3 per cent while Titagarh Wagons fell 6.2 per cent.

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

The yield spread on Indian Railways's 2017 dollar bond over treasuries dropped six basis points to 196, according to data compiled by Bloomberg. The carrier's revenue will rise to 1.44tn rupees in the year starting April 1, compared with a revised target of 1.26tn rupees this year. The increase in passenger fares last month will add 66bn rupees in annual revenue.

The railway will add 500 kilometres of new track in the next fiscal year, the minister said. India has added an average 180km of railway every year since gaining independence in 1947, according to the rail ministry. The nation has about 65,000km of track. By comparison, China plans to expand its network to 120,000km from 91,000km in the five years ending 2015.

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

* Bloomberg News