The government has hiked railway passenger fares after a gap of nine years, signalling Prime Minister Manmohan Singh’s intent to push ahead with politically unpalatable but vital reforms for an economy on track to post its worst growth rate in a decade.
Sources in his government said on Wednesday it also proposed an increase in heavily subsidized fuel prices to rein in a swollen fiscal deficit.
The country’s strained finances have hit capital investment and put its sovereign credit ratings in peril. The economic slump is also making it tougher for Mr. Singh to fund flagship welfare programs ahead of a national election due by mid-2014.
Railways Minister Pawan Kumar Bansal said the passenger fare increase will help generate 66-billion rupees ($1.12-billion) for the cash-strapped rail system, whose creaky service has become a drag on the economy.
The government tried to raise the fares, unchanged since 2004, in March 2011 but protests from the Trinamool Congress forced Mr. Singh to abandon the plan. Dinesh Trivedi, the erstwhile railways minister, also resigned over the issue.
The refusal by successive ministers to raise passenger rail fares has strained the finances of the railways, sapping its capacity to lay new track, modernize services and improve safety.
A sleeper ticket from New Delhi to Mumbai, about 1,390 kilometres away, can cost as little as about 400 rupees ($7.20).
Mr. Bansal said the fare hike, which will be effective from Jan. 21, was necessary. “Facilities and safety measures will improve with an increase in fares.”
India’s economic growth that once promised to hit double-digits has languished below 6 per cent for the past three quarters. One of Mr. Singh’s key policy advisers, Montek Singh Ahluwalia, last month said economic growth could get stuck at 5 to 5.5 per cent if a policy logjam continues.
Mr. Singh has been pitching for a phased adjustment in domestic energy prices since last month to align them with global markets, warning that business-as-usual policies won’t deliver higher growth.
India’s policy to subsidize retail prices of fuels such as diesel, which account for about 40 per cent of refined fuel consumption, to benefit the poor is a major drain on the exchequer.
These populist policies have swollen India’s fiscal deficit, while funding through heavy market borrowing has driven up borrowing costs for private investors and dimmed economic growth prospects.
Officials at the oil ministry said on Wednesday that the ministry has proposed to the federal cabinet an increase in diesel prices of a rupee per litre every month, and an increase in the cap on subsidized cooking gas cylinders.
The fuel prices were last raised in September when a beleaguered government, under pressure from credit rating agencies, launched some of its most daring initiatives – which also included opening the retail and other sectors to foreign players.
“There is also a possibility that the government may decide to raise diesel prices by 4-5 rupees a litre instead of going in for a phased increase,” one of the oil ministry officials said.
“With general elections due in 2014, raising prices will be difficult in the second half of this year.”
Ratings agencies Standard & Poor’s and Fitch have warned that a widening fiscal deficit has put India on the brink of losing the investment grade status enjoyed by fellow “BRICS” Brazil, Russia, China and South Africa.
“It’s positive news, as rise in fuel prices will help curtail subsidy bill, and hence the fiscal deficit,” said Vivek Rajpal, fixed income strategist at Nomura in Mumbai.
New Delhi aims to trim the fiscal deficit to 5.3 per cent of gross domestic product in the fiscal year that ends in March after overshooting the official target of 4.6 per cent last year by 1.2 percentage points. But given the revenue and expenditure mismatch, many economists dub the target as optimistic.