India 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 (600 miles) 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 percent in the 12 months to Feb 6, after an annual rise of 17.94 percent 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 percent in January to 10 percent 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 DH 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. - Reuters