The development comes after the National Democratic Alliance government this year broke a 92-year-old tradition of presenting a separate Railway Budget, according to suggestions made by the Debroy committee.
The Cabinet on Wednesday initiated a major reform by approving the setting up of a regulator called the Rail Development Authority (RDA).
Sources said the ministry of railways would issue a notification in this regard within a week and a search-and-selection committee would be convened soon.
According to the plan, the RDA is likely to be functional by August 1. The regulator will decide on tariffs, ensure fair play and a level playing field for stakeholder investment in the railways, set up efficiency and performance standards and disseminate information.
The RDA will help the government take appropriate decisions on important policy and operational issues, including pricing of services commensurate with costs, suggest measures for enhancement of non-fare revenue, ensure protection of consumer interests, promote competition, encourage market development, create positive environment for investment and promote efficient resource allocation.
It will also benchmark service standards, suggest measures for absorption of new technologies and human resource development and provide a framework for non-discriminatory open access to the dedicated freight corridor infrastructure.
The concept of a regulator was first mooted in the railways in 2001 by an experts group under the chairmanship of Rakesh Mohan. This was later reiterated by the National Transport Development Policy Committee (NTDPC) in 2014 and a panel under Bibek Debroy in 2015.
In the Railway Budget of 2015-16, Railway Minister Suresh Prabhu had announced that for the purpose of orderly development of infrastructure-enabling competition and protection of customer interest, it was important to have a regulation mechanism independent of the service provider.
The authority will have a chairman and three members and can engage experts from relevant areas. The team will have a five-year term. The selection of RDA members is likely to happen by July 15. The government will provide an initial corpus of Rs 50 crore (Rs 500 million) for setting up the organisation.
Experts said the RDA would provide transparency to passenger and freight tariff determination and protect consumer interest by ensuring quality of service and cost optimisation. It would also monitor policies on public-private partnerships.
The development comes after the National Democratic Alliance government this year broke a 92-year-old tradition of presenting a separate Railway Budget, according to suggestions made by the Debroy committee.
A separate Railway Budget was first presented in 1924, after recommendations of a panel headed by British railway economist William Acworth in 1920-21.
Photograph: Rupak De Choudhuri/Reuters