New Delhi, Feb 24 (PTI) Railway Minister Suresh Prabhu faces a stiff dilemma on whether to raise fares and freight rates in his second Rail Budget tomorrow as railway finances come under tremendous strain.

While the falling revenue collection and increasing demand for funding various capacity augmentation projects as well as the requirement for improving passenger services demand hiking up fares, a section in Railway Ministry does not favour any such move, saying an increase at this juncture will not be a very good idea as elections are round the corner in four states and diesel price is on the downslide.

"Diesel price is on the decline. Passenger bookings and goods loadings are also on downslide. So at this moment hiking freight rate and passenger fares will affect the Railways adversely," sources in railways said, adding "fare hike can be effected anytime after budget also, if required and it is not necessary that it has to be done only in the budget."

Besides, Prabhu will also have to take call on whether to impose safety cess for strengthening safety measures to prevent accidents.

However, railways have already decided to run as many special trains on higher fares in popular routes catering to the growing demand during festive season, an indirect way of hiking fares.

Upgradation of existing coaches with modern facilities and improved interiors are being planned in a big way to run trains on higher fares like the recently launched Mahamana Express between New Delhi and Varanasi.

The cross-subsidy from freight to passenger operation has crossed Rs 30,000 cr this year while the Seventh Pay Commission burden is about Rs 32,000 cr.

Railways have earned Rs 136,079.26 crore as against the target of Rs 141,416.05 crore during April-January period, a decline of 3.77 per cent.

Railways had effected a 14 per cent across-the-board hike in passenger fares in 2014 during the NDA regime and a 10 per cent increase last year.

However, despite the grim economic condition, the Railway Budget is expected to focus on massive capacity creation in the rail sector with an increased plan outlay of about Rs 1.25 lakh crore.

A significant amount will be earmarked for safety upgradation, electrification, doubling and modernisation of yards to clear traffic bottlenecks, the sources said.