The government unveiled a $9 billion plan on Wednesday to expand its creaky and overstretched railway system and cut rail freight rates on grain and kerosene, a move which could help ease growing inflationary pressures.
The government plans to build more than 1,000 km of track and add 18,000 rail cars in the year to March 2011, Rail Minister Mamata Banerjee said as she presented the railway budget for the coming year to parliament.
It will also permit private operators to invest in rail infrastructure and run special freight trains to ease transport bottlenecks which have long been a brake on India's growth.
The railway budget comes just two days ahead of India's general budget on Friday and was closely watched by analysts to gauge the reformist appetite of the Congress party government, whose voter base is heavily rural and poor.
With Asia's third-largest economy recovering briskly from the global downturn and inflation mounting, financial markets are looking to the government to balance its desire to continue nurturing growth while restoring the health of public finances.
"Should commercial viability be the only criteria (for railway expansion) or should social responsibility be an important consideration? I prefer the latter," Banerjee, who heads a key ally of the Congress party, told parliament.
Two arms of the Indian railways will borrow a total of 91.2 billion rupees billion rupees ($1.97 billion) in the year to March 2011 to fund the expansion, she said. Savings of 20 billion rupees would also help, she added.
In a move which could help cool surging food and fuel prices, the government also announced that freight rates for food grains and kerosene would be cut by 100 rupees ($2.20) per railcar.
India's food inflation picked up for the fourth straight week in early February, heightening worries it was driving headline inflation past official forecasts and increasing the chance of the central bank pushing up interest rates.
Food prices rose 17.97 per cent in the 12 months to Feb. 6, after an annual rise of 17.94 per cent in the previous week.
Climbing food and fuel costs along with a pick up in manufacturing prices are expected to push headline wholesale price inflation (WPI) from 8.56 per cent in January to 10 per cent by March, according to some analysts and India's chief statistician Pronab Sen.
"It is not a populist budget as such. In an inflationary situation, any increase in fare and freight rates would have led to inflationary spiral," said D.H. Pai Panandikar, head of think tank RPG Foundation.
"I think it sets the tone for the Friday's general budget. One can expect the government to take some measures like increasing the personal income-tax exemption limit to provide some relief to the people at the margins from rising inflation."
India's railways carry over 18 million passengers and 2 million tonnes of freight each day. Some 17,000 trains travel over a 64,000-km-long network which spans the country from the icy heights of Kashmir to the balmy beaches of Kerala.
But the network is bursting at the seams and suffers from obsolete technology and infrastructure. In 2009, one rail accident was reported every two days, and a sizeable amount of food spoils before it ever gets to market.
"The spending will boost infrastructure but the big question remains how they plan to fund it," Arun Kejriwal, director at research firm KRIS.
"On the face of it, it looks a huge challenge."
Financial markets largely ignored the rail budget as they looked to the federal budget on Friday for more details on government borrowing plans.
The benchmark stock index slipped 0.2 per cent and the yield on most actively traded government bond was little changed on the day at 7.8 per cent.