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• Linking fuel costs to freight tariffs would effectively mean that the railways would pass on any increase in the cost of fuel to end-users.Indian Railways may link freight rates to the prevailing price of fuel in a move that would make it more expensive to transport commodities such as iron ore, coal and foodgrain through the railways, raising prices for end-users, a top railway ministry official said. Rising fuel costs have left the state-run transporter with “no choice” but to consider such a step, said the official, who spoke on condition of anonymity. The move may be announced in the railway budget on 14 March, but the official declined to comment on any specifics of the proposal.

• At present, freight rates are based on distance, but there is no direct linkage between tariffs and the cost of fuel. Linking fuel costs to freight tariffs would effectively mean that the railways would pass on any increase in the cost of fuel to end customers.The cost of diesel and electricity used as fuel makes up the second largest chunk of working expenditure at the railways after staff costs. The railways has been under increasing financial constraints with its operating ratio, which indicates the amount spent for every rupee earned as revenue, rising to 92.3% in 2010-11 from 75.9% in 2008-09.

• Under the so-called dynamic freight policy, the railways periodically revises freight charges on various commodities it carries. The last major increase under this policy was carried out on 14 October, when the railways raised freight rates by 6% across all commodities it carries, including iron ore, coal, foodgrain and fertilizers. R. Sivadasan, a former financial commissioner at Indian Railways, said a mechanism linking freight rates and fuel costs was proposed in 2006, but failed to gain currency. He said the railways asked the Indian Statistical Institute, Kolkata, to work out a formula for such a linkage. Sivadasan said then railway minister Lalu Prasad was not keen on implementing the proposal.

• “At that time, we had figured that for every one rupee increase in the price of diesel, the railways would have to shell out Rs. 200 crore extra,” he said. Between April 2011 and January 2012, the railways earned Rs. 55,381 crore as freight revenue, constituting a 9.7% increase over the year-ago period. The railways is likely to earn about Rs. 68,000 crore from freight revenue in the entire fiscal year.“The railways typically marks freight charges based on the ability of a certain section of the clientele to pay. So, iron ore freight charges change more often than those on coal,” said Abhaya Agarwal, an executive director at audit and consulting firm Ernst and Young.

• Agarwal, however, said that such a move will have a “limited impact” because the government mitigates the rise in diesel prices and power tariffs for consumers.On 16 October, Mint first reported that the railways could consider linking passenger fares to the cost of fuel, instead of an across-the-board increase. On 11 November, railway minister Dinesh Trivedi said the railways was working on such a formula, without a timeline for the proposed move.The railways earns about Rs. 30,000 crore annually from passengers. Passenger fares were last raised in 2002-03.

• In another move, likely to be announced in the budget, the railways could increase its market borrowings through its financing arm, Indian Railway Finance Corp. Ltd (IRFC). The railway official cited above said IRFC could be asked to raise “substantially more” money than in the last budget. He, however, declined to comment on the increase.In the 2011 budget, IRFC had been mandated to raise Rs. 20,594 crore from the market, out of which the agency raised Rs. 14,000-14,500 crore, according to a senior IRFC official. This official said that out of this, Rs. 7,000 crore had been raised by way of tax-free bonds, as against an initial mandate of Rs. 10,000 crore.“During the year, the railways decided to scale down its planned expenditure so the requirement for finds had to be revised,” the IRFC official said.This official, however, said he was not aware if IRFC will be asked to borrow additional funds.“Such decisions are taken at the level of the Railway Board,” he said. The official added that the agency’s cost of borrowing during the current fiscal was 8.5-8.6%.

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