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11732Does railway hike mean tough Budget measures coming?

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  • Thiagarajan Arunachalam
    Jun 21, 2014

      NEW DELHI: Within minutes of the government announcing an increase in railway passenger and freight tariffs, some TV channels were repeating visuals from last Saturday when Prime Minister Narendra Modi talked about "bitter medicine" to rescue the faltering economy, even at the cost of his party's popularity.

      Economists reckon that the statements by the PM and his ministers, along with Friday's hike, should be seen as pointers to some tough decisions in Arun Jaitley's first budget as finance minister.
      "It shows that the government is ready to bite the bullet. They should be biting the fiscal bullet in the budget. Although the increase in rail tariffs is pretty steep and will cause some discomfort in the short term, it is crucial from the point of view of railway finances," said D K Joshi, chief economist at Crisil, the ratings and analytics firm.

      "It shows the government's seriousness about fixing some of the problems facing the Indian economy. Although it will affect almost everyone, as freight rates as well as passenger fares have been raised, it does signal that the there may be some tough decisions in the budget as well," said Devendra K Pant, chief economist at India Ratings.

      For the government, a series of tough measures would mean reducing the food, fuel and urea subsidy to target them better, cut down on giveaways and rework some of the schemes launched by the UPA, which are seen to have severely impacted government finances.

      With the violence in Iraq, the government's fiscal position will come under further strain, given that the cost of crude has increased, and is expected to result in some of the burden being transferred to consumers. Already, the petroleum ministry is discussing the possibility of deregulating diesel prices, so that it can move in line with change in crude prices. It had also proposed that the cost of subsidized cooking gas cylinder should be raised. Again, these are decisions that are not linked to the budget but economists expect that some message will be there in the government's first full-fledged economic policy statement.

      Similarly, the fertilizer ministry has suggested that the new urea policy should be implemented so that the subsidy burden comes down. Else, the finance minister should increase the allocation.

      Finance ministry officials argued that a reduction in wasteful spending will lower government borrowings, releasing more funds for the private sector to borrow, ease the pressure on interest rates and boost investment, which will boost economic growth.

      In any case, it is easier for the government to take some of the more difficult decisions in the first few years of its tenure and hope that the gains start accruing from the third or the fourth year of its term. Elections in some crucial states, such as Maharashtra, however, will figure in the BJP government's calculations.