The hike, effective from October 1, is expected to increase steel prices by 1,000 per tonne, or 3-4%m while the coal freight hike would increase electricity tariff by up to 3%. The decision has come at a time when wholesale price index (WPI) based inflation rate increased from 5.79% in July to 6.1% in August.
The railways' price adjustment is part of the busy season tariff schedule. Under a dynamic pricing policy, the national transporter has divided a year into two components -- busy season and lean season. The busy season charge is not levied between July and September as these three months are considered lean for business. Container and automobile traffic are exempted from the busy season traffic.
According to Railway Board sources, with the sharp increase in freight charges this year, railways may now not burden its customers further with a hike bi-annual fuel adjustment component (FAC) where it levies a surcharge on freight rates on the basis of fluctuation in oil prices. In the last rail budget, railways had levied 5% FAC on its commodity rates. The precedent is that busy season freight charges are 10-12% higher than the lean period.
Experts say the railways' move would be inflationary in nature as all commodities, including petroleum products and grain (food inflation is persistently high), have been included in the hike.
"The railways move couldn't have been more ill-timed. At a time when manufacturing sector is hoping for a recovery, it has imposed a price hike. The move would definitely impact retail steel prices by Rs 500-1,000 a tonne and hit producers who are anyway facing a slowdown in demand," said an official of Essar Steel asking not to be named.
It is a double whammy for the steel industry as freight rates have also been increased for its prime raw material -- iron ore. A private power project developer said that the railway decision would push up coal cost by up to 5% and impact electricity tariff by 2-3%.
For the current fiscal, the railways has set the freight target at 1,047 million tonne (MT), which is 40 MT higher than the last year. Freight earnings are expected to grow by 9% to Rs 93,554 crore as per the budget. With the increase in the revenues, operating ratio of the national transporter are expected to improve to 87.8% in 2013-14 from 88.8% in the last fiscal. According to the last budget, railway revenues will show a balance of Rs 12,506 crore in 2013-14.