India hikes rail fares ahead of new budget

By Tommy Wilkes

NEW DELHI (Reuters) - The government on Friday pushed through a steep hike in rail passenger and freight fares, the first dose of the "bitter medicine" Prime Minister Narendra Modi has warned is needed to revive the economy.

India's railway network is one of the world's largest, but years of low investment and populist policies to subsidise fares at affordable levels have crimped growth in new lines and hindered private investment.

From June 25, rail passenger fares will increase by 14.2 percent and freight rates by 6.5 percent, the railways ministry said in a statement. The last fare hike was in October 2013.

"To meet all the necessary expenditure, I was forced to implement the order," Railway Minister Sadananda Gowda told reporters after announcing the increase.

Indian trains are among the world's cheapest. A ticket on an overnight sleeper train running the roughly 1,400 kilometres between New Delhi and Kolkata, for example, can cost as little as 520 rupees ($8.65).

Many Indians see the railways, which transport an estimated 25 million people each day, as a service for the "common man". Many riders are poorer Indians who have missed out on the fruits of two decades of surging growth that enabled millions of their compatriots to buy cars or travel by air for the first time.

The previous government deferred a plan to increase fares in May, leaving the decision to Modi's new administration.

Modi prepared the ground last weekend in comments to workers of his Hindu nationalist Bharatiya Janata Party. He asked them to back the steps he planned to restore the health of Asia's third-largest economy, which has suffered its longest slowdown since the country embarked on free market reforms in 1991.

Analysts at Nomura said the increase in passenger fares would raise consumer price inflation by around 10 basis points, while the freight hike would impact wholesale price inflation - which hit a five-month high in May - because the cost of transporting key goods like steel would rise.

The government is also expected to open up parts of the rail network to foreign investors, which some officials say is necessary to modernise one of the country's last great state-controlled industries.

The government will present its budget by mid-July.

($1 = 60.1150 rupees)

(Reporting by Tommy Wilkes; Writing by Rajesh Kumar Singh; Editing by Clarence Fernandez and Tom Heneghan)