Jaitley Says Rail Fare Hikes Correct, Markets Give Thumbs-Up

Finance Minister Arun Jaitley on Monday said Railway Minister D.S. Sadananda Gowda's decision to hike fares was a "difficult but a correct decision".

India's railway network is one of the world's largest, but years of low investment and subsidised fares have crippled growth forcing the Modi government to announce a passenger fare hike of 14.2 per cent and freight rate hike of 6.5 per cent on Friday. The passenger fare hike could bring nearly Rs 6,000 crore to the railways.

"A loss making railway will provide below-par services. It will eventually not even have the resources to pay its' bill. India must decide whether it wants a world class railway or a ramshackled one," Mr Jaitley said in a Facebook post today.

The finance minister said the decision to hike fares was notified by the previous UPA government on May 16, the day when poll results were announced, but the then Railway Minister Mallikarjuna Kharge developed "cold feet" and countermanded the order of the Railway Board.

"The choice before Shri Gowda was whether to allow the Railways to bleed and eventually walk into a debt trap by following the policy of the UPA government or implement the decision which the UPA Government had taken to increase the fares for both passenger and freight but did not have the courage to implement," Mr Jaitley wrote.

The groundwork for the politically sensitive decision was take last week by Prime Minister Narendra Modi, who last week had asked party workers to be ready for bitter pill to revive the economy.

Mahesh Nandurkar of CLSA says PM Modi has started "implementing the bitter pill with rail fare hike." The hike is a welcome step, he added.

Railway stocks outperformed the broader markets in early trade. Analysts say, the decision to hike fares has raised hopes that the upcoming budget would be reform-friendly.

Chetan Ahya of Morgan Stanley said the government has started with a decisive move and the decision shows the government is willing to deliver on productivity.

Nomura's Sonal Varma said the fare hikes will add slightly to inflation in the near term, but will improve the profitability of the railways and hence is a move in the right direction.