Indian Railways is casting about for ways to cushion the impact of spiraling fuel prices and may raise passenger fares as a last-ditch measure. An increase in diesel prices in June has added to the worries of the state-run utility, whose finances are already strained by populist measures.

The price increase will put an estimated burden of Rs 720 crore every year on the railways. "The increase in diesel prices is a heavy burden on us. We are trying to have our expenditure under control," said Indian Railways financial commissioner Pompa Babbar.

The railways last month sought a service tax exemption on movement of freight and the revenue generated from auxiliary services like advertisements and parking lots, among others. The proposal is being discussed by the Planning Commission and the finance ministry, Babbar said.

The utility is also considering seeking service tax waiver on rolling stock manufactured for domestic use. An increase in passenger fares could be taken up if these proposals are not accepted. Last week, the Comptroller and Auditor General ( CAG) said the railways should consider rationalising freight and passenger fares to improves its finances.

Railways' total revenue for financial year 2010-11 stood atRs 97,151 crore, as againstRs 89,229 crore in the previous year. Expenditure in 2010-11 was Rs 88,129 crore, as againstRs 83,685 crore in 2009-10. The utility has also requested the Railway Convention Committee to reduce the dividend payment for the current fiscal by Rs 1,850 crore.

Railways only pays an interest in perpetuity for the funds procured from the finance ministry. Railways consumes about 2.4 billion litres of diesel every year, entailing an expenditure of close to Rs 4,500 crore, or about 7% of its ordinary working expenses.

The world's fourth largest rail network, which is steadily losing passengers to no-frills airlines, may raise passenger tariffs as a last-ditch measure. Passenger fares are cross-subsidised and have not been raised in the last eight years.

"To overcome inflationary pressures, the railways should rationalise passenger tariffs, improve asset productivity and do capacity augmentation to improve operational efficiency," said Abhaya Agarwal, executive director and PPP leader at Ernst and Young Pvt Ltd. Babbar refused to comment on the possibility of an increase in passenger fares. "The easiest thing is to raise fares.

But, we are trying to service both rich and poor," she said. Railways has an operation ratio (expenses/total income) of more than 90%, which leaves little surplus with the organisation. It has not been able to pass on inflationary increase in costs, including salaries, to passengers because of the Sixth Pay Commission.