India keeps railway fare hikes on hold ahead of state elections

By Tommy Wilkes and Manoj Kumar

NEW DELHI (Reuters) - India will pump $17.6 billion into its decrepit, loss-making railway network in the coming fiscal year, up a fifth from this year, but the government shied away from the politically unpopular move of raising fares ahead of crucial state polls.

The world's fourth-largest rail network, saturated and slow after years of underinvestment, is one year into a five-year, $137-billion investment plan that Prime Minister Narendra Modi is betting on to overhaul the system and boost economic growth.

(Graphic: India's railway network, recent growth rates | Click http://fingfx.thomsonreuters.com/2015/02/24/082831f4ee.jpg)

Presenting the annual rail budget for 2016/17 on Thursday, Railway Minister Suresh Prabhu said the network needed more revenue to offset a wage bill rise of $4.7 billion, slower growth in passenger and freight receipts and to fund the 21 percent rise in the budget to 1.21 trillion rupees.

(Click http://in.reuters.com/subjects/india-budget-2016 for full coverage of railway and union budget)

"These are challenging times," Prabhu told parliament.

Modi has prioritised overhauling India's dilapidated infrastructure in his first 20 months in power. But in keeping fares low, his government is sticking to a tried and tested political formula of avoiding tough but critical decisions to cut subsidies and ease a squeeze on central government funding.

Some 23 million, mostly poor, people use India's trains every day, and together with the railways' workforce of 1.3 million, have made successive governments reluctant to adopt reform.

"The railways budget is going to put more pressure on the general budget. They should have gone for a marginal hike in fares," said N.R. Bhanumurthy, an economist at Delhi-based, government-funded think tank, the National Institute of Public Finance and Policy.

Modi's government is also expected to focus on more populist spending measures in Monday's union budget, as he looks to shore up support ahead of four state elections this year.

India government bonds and the rupee slumped after the railway budget was announced, as fears grew that New Delhi would widen its 2016/17 fiscal deficit target of 3.5 percent of gross domestic product to afford higher spending.

Railway-related stocks Kalindee Rail and Texmaco Rail extended losses after the budget as Prabhu, to rounds of parliamentary applause, stuck largely to smaller announcements such as free WiFi at railway stations and the world's first bio-vacuum toilet on a train.

Still, some analysts praised Prabhu for avoiding too many spending promises that the railways cannot afford.

"The budget comes out to be focused on consolidation rather than expansion," said Jaijit Bhattacharya, an infrastructure expert at KPMG in India. "Overall, a mature rail budget that balances much needed investments with the revenue and funding constraints."

The money spent on the railways is a little over 2 percent of overall public expenditure, but its symbolic importance and political resistance to change have discouraged governments from scrapping the tradition of a separate budget.

HEAVILY SUBSIDISED

Cheap fares mean little extra income to improve services. A 3,150-km (1,960-mile) trip between New Delhi and Thiruvananthapuram can cost as little as $8, not much more than a trip on the underground in London.

India inherited a railway network from the British more than twice as long as China's, but has since grown it by a fifth to 65,000 km (40,390 miles). China now has a network close to double the size.

The government will hand the railways 450 billion rupees in funding for next year, up 12.5 percent on this year, but most of that will be sucked up by the wage bill.

It is in rising revenues that Prabhu said he will find the cash to keep the modernisation plan on track.

The railways predict a rise in revenue receipts to 1.85 trillion rupees next financial year, up 10.1 percent from this year. That compares with a rise of 7 percent over last year, as fewer travellers took trains than expected.

The railways will also look to areas such as advertising and station redevelopment to boost the share of non-tariff revenue.

Prabhu said the railways also would seek to revive its freight business, which provides two-thirds of revenue, but is struggling as industrial production falls.

"We need to look beyond the current approach to expand the basket of freight commodities. We will make sure we recapture the traffic," he said, announcing plans for three new dedicated freight corridors across India.

($1=68.71 rupees)

(Writing by Tommy Wilkes; Editing by Kim Coghill and Clarence Fernandez)