As we all know much hopes are rested on the Narendra Modi led NDA Government for 'acche din' (or a better future). In fact the BJP led NDA won the 16th Lok Sabha election promising heydays to the electorates, a change for the good; amid a mood of anti-incumbency.

But in little over a month of its Governance, the NDA Government has given a rude shock.

Recently, the Railway Ministry increased passenger fares by 14.2% and freight charges 6.5% effective June 25, 2014. Now, while the hike seems quite reasonable per se, it has hammered hard on the season ticket (or pass) of suburban local trains in Mumbai. For some routes and destination in Mumbai, the hike has been as high as 150%. The tweak here is that, monthly fares for suburban and non-suburban services shall be charged on the basis of 30 single days, instead of the current 15 single days; which has left fares double and more than double in some cases.

It is noteworthy that, for a place like Mumbai which has expanded horizontally (and vertically), even a distant suburb today is considered very much a part of this city of dreams, where the aam admi travels by Mumbai's lifelines i.e. the local trains, to earn his bread and butter; the fare hike certainly a big pinch on the aam admi's pocket, which could lead to household budgets get awry.

Here's why?
Inflation is bound to go up. The increase in freight charges would have detrimental impact on food prices, as some items are transported by railways. While the NDA Government has initiated action points to expand supply in case of some food article, the perils yet exist from hoarding (especially in case of state Governments run by political party(s) other than the BJP or its allies in the NDA) and of course a sub-normal monsoon (due 60-70% chances of an El-Nino phenomenon).

Also, with cement being a major item usually transported by railways, the increase in freights may also reveal implication on construction cost in the real estate sector.

So are there chances of any rollback?
The Government is being criticized by almost all sections. Those who voted for Mr Modi are feeling backstabbed. Instead of making life easy and more cheerful, there is a view that the NDA Government has bullied them by imposing a fare hike.

There is some discomfort from a NDA ally as well. The Shiv Sena (the second largest party in the NDA) has raised a red flag over railway fare hike. The Shiv Sena is well aware that such move will possibly not go well ahead of the Maharashtra Assembly elections scheduled in October 2014.

But is this a bitter pill for a better future?
You see, Mr Narendra Modi had explicitly made a public statement earlier, saying that, it is necessary to take steps to improve financial discipline and improve the economic health of the country. He also added that his popularity might go down due to these hard decisions and people might be annoyed, but they will appreciate it later. Even the finance minister, Mr Arun Jaitley has said that increasing railway fare was a difficult but a correct decision.

The Government forsees...
 

• An increase in the revenues of Indian Railways by Rs 8,000 crore a year
• Offering better railway infrastructure
• Improving better travel experience of commuters
   

So is the move justified?
India has one of the largest railway networks in the world. Since majority of citizens of India are connected to Indian Railways in some or the other way, any decision pertaining to railways is politically sensitive. In the past, hard-decisions have been avoided and passed on to the next Government, the chain has continued for years.

In February 2012, committee appointed under the chairmanship of Mr Anil Kakodkar for reviewing the level of Safety in railways, expressed concerns over the dire state of railways. In the report, the committee noted that, "the financial state of Indian Railways is at the brink of collapse unless some concrete measures are taken. Passenger fares have not been increased in the last decade (a decade before February 2012) during which many passengers carrying trains were introduced on the existing overloaded infrastructure. This has strained the infrastructure way beyond its limit and all the safety margins have been eaten up pushing Indian Railways to a regime of adhocism in infrastructure maintenance."

Some statistics...
Indian Railway, once had a share of 65% in the movement of goods across the country, which has substantially reduced to nearly 30% at present. The reason is movement of goods through railways is expensive. The fact is, in India, decisions pertaining to Indian Railways have been taken to win hearts. As a result, passenger fares in India are among worlds' lowest while freights are among other countries in the world are high. High freight rates result in higher transport cost which actually fuels the inflation. But, railways incur a loss of Rs 900 crore per month on passenger segment which is partially offset by revenue earned by freight. From close to Rs 12,000 crore in 2004-2005, loss on the passenger segment has shot up close to Rs 26,000 crore in 2013-14.

Five railway federations wrote a letter to the then Prime Minister, Dr Manmohan Singh in 2012 as an attempt to draw attention of the Government to issues which needed immediate action. The general secretary of All India Railwaymen's Federation, said in the letter, "we are 30% short of staff in the area of track maintenance, ticket-checking staff etc. Every year the number of trains keeps on increasing. At present, we are responsible for running 19,000 trains everyday with the same staff strength."

Some other facts...
 

• First train in India ran between Chatrapati Shivaji Terminus (CST) (earlier known as Victoria Terminus) and Thane back in 1853 at a speed of 28 kilometers per hour which took around 75 minutes to reach its destination. Today, 161 years later it runs between two destinations at an average speed of 50 kilometers per hour and takes only about 15-17 minutes less.
   
• During 11th five-year plan infrastructure investment target was underachieved by 25% in railways while telecom and gas pipelines over achieved targets by about 25% and 80% respectively. This happens when there is a need to add massive infrastructure to railways. It shows that investment in railways is unattractive because of high operational ratio and lower returns on investments. At present operational ratio of Indian Railway hovers at 90%, this is poor. Stretched budgets are equally a constraint
   
• Without securing funding requirements new train routes are often announced. Kakodkar committee had made negative remarks on such practices. On March 31, 2011, 347 projects were pending for various reasons resulting in cost escalation of about Rs 1,470 crore.
   
• Since Independence India added about 13,000 kilometers of new rail-roads, on the other hand, China added about 14,000 kilometers of new lines in 5 years between 2006 and 2011. Although this progress is not comparable for various reasons, it suggests that India needs to make speedy progress in expanding its railway network and making it more efficient.
   

The Indian Railway is a dire state with heavy losses incurred. If not saved now it may go 'Air India' way and would need a bailout one day.

PersonalFN believes the contrast between freight rates (which are very high) and passenger fares (which are very low) has to be reduced. So far high freight rates have been saving grace for railways. While subsidies are good, they ought to be rationalized to maintain a fair balance.

PersonalFN is also of the view that, no matter how bad the state of Indian Railway is, hiking rates by as high as 150% is rather steep and as cited earlier a big pinch on the 'aam aadmis' pocket. 'Pay and use' formula may sound perfect on commercial terms but every Government action should have a human face, which is absent here. A hike in phased manner would have been a better option.

Unfortunately, when any party sits in opposition, takes a different stand than what it does while it is in power. Mr Modi had criticised UPA Government for raising fares a year ago. On the other hand, Congress too is now criticizing the NDA Government for the same action which it had backed while being in power. The NDA Government will have to provide some respite to people in some or the other form. May be Union Budget is an event to watch out for.

Thus, PersonalFN always recommends its financial planning clients that they should rationalise their expenses in order to absorb a shock of some unforeseen development. Financial Planning is not only about earning high returns on investments, but also means prioritising and streamlining expenses as well.

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