By Manoj Kumar and Matthias Williams
NEW DELHI (Reuters) - India reined in spending on its vast but decrepit rail network on Tuesday, setting the tone for what is expected to be the most austere federal budget in years in two days' time as the government struggles to tame its fiscal deficit.
Gross budgetary support for the railways will rise nearly 8 percent to 260 billion Indian rupees ($4.82 billion) in the coming fiscal year, less than half the 20 percent increase that was allocated in last year's rail budget.gra
India's railway network is the world's fourth-largest but it has suffered from years of low investment and political meddling. The result is a creaking system plagued by delays, overcrowding and slow freight delivery times that sap the competitiveness of Asia's third-largest economy.
But Prime Minister Manmohan Singh's government faced the challenge of raising revenues to modernize the network without alienating voters ahead of an election due by May 2014. More than 20 million Indians use the network every day, many of them poor people who see cheap rail travel as a right.
Railway Minister Pawan Kumar Bansal's budget defied speculation of a second round of hikes in basic passenger fares after a 21 percent increase in January. But there was a nearly 6 percent hike in freight traffic rates and additional charges on some passenger tickets, mostly for wealthier passengers.
His budget was delivered to parliament two days before Finance Minister P. Chidambaram unveils what is expected to be an austerity budget to cut India's bloated fiscal deficit, restore investor confidence and revive sagging economic growth.
"The main read-through to the Union budget is that government spending will likely rise at a slower pace and suppressed prices will be passed on to consumers, but only at a very gradual pace due to the risk of consumer backlash ahead of the elections," said Sonal Varma, an economist at Nomura.
The government increased passenger fares for the first time in a decade in January, a move aimed at raising money for a ministry that spends more than half its budget paying the salaries of 1.4 million employees and retired workers' pensions.
The last time a railway minister tried to do that - in the budget last year - he was sacked within days following a political backlash. Indian rail fares can be very cheap: it costs as little as $9 to travel the nearly 1,400 km (870 miles)from New Delhi to the financial hub, Mumbai.
Bansal promised strict fiscal discipline in his ministry during a wide-ranging speech that referred to the cleanliness of railway linen and the safety of elephants straying on to the tracks, and even included lines from a famous poem about a train puffing uphill that sings "I think I can, I think I can".
But in a sign of tougher reform measures to come further down the line, Bansal proposed partially deregulating ticket prices, linking both passenger and freight rates to the cost of diesel. Earlier this year, India began a gradual deregulation of diesel, which is currently heavily subsidized.
However, Bansal only applied the fuel-linked increase to freight fares. He did not specify when passenger fares would be hit, or when the floating mechanism will be introduced.
"It does seem that he has ... tried to toe the line between the requirement of getting points before the election and looking at a better financial position for the railways," said Jyotinder Kaur, an economist at HDFC Bank.
Bansal is the first railway minister to come from the country's ruling party in 17 years. The post is often doled out to junior partners of the ruling coalition.
Critics say successive rail ministers have used the post for political ends, laying tracks and wagon factories in their home states to win votes. This comes at the cost of upgrading a network that was mostly built before independence from Britain in 1947 and receives scant private sector investment.
The main opposition Bharatiya Janata Party (BJP) slammed the railway budget for promising a wheel factory in Rae Bareli, the constituency of Sonia Gandhi, the chief of the ruling Congress party who is seen as the country's most powerful politician.
A report submitted to the government last year estimated that a properly run railway network could add 1.5-2.0 percent to the country's economic growth and raised concerns about a lack of safety due to chronic under-investment.
In a reminder of the scale of the challenge Bansal faces to improve safety, riots broke out in central India on the same day as the budget speech after two children were run over by a goods train, local media reported.
(Additional reporting by Shamik Paul, Annie Banerji, Frank Jack Daniel and Arup Roychoudhury; editing by John Chalmers and Sanjeev Miglani)