It is one of the world's oldest and busiest rail networks, carrying 23 million people on 12,000 trains every day, including students, rural labourers and middle-class workers. But a 14% rise in heavily subsidised passenger fares has sparked outrage across the country, leading to protests as the new government prepares to unveil its annual rail budget.

Hundreds of people gathered in New Delhi on Monday to protest against rising food, fuel and transport costs, including the rise in train ticket prices, disrupting the opening session of parliament. Freight has also been increased by 6.5%, making commodities such as cement, iron ore and coal more expensive.

India's finance minister, Arun Jaitley, defended the fare rise, citing a $5.5bn (£3bn) loss on passenger fares alone.

"If we didn't hike fares, the railways would have shut," Jaitley told India's lower house of parliament. "If you're using a service, you should pay for it."

India is the only country to have a separate budget for its railways, a provision dating to a 1924 precedent set by British colonial rulers. For decades, rail accounted for the majority of passenger and freight traffic.

But today, as India's government-owned rail network faces competition from better roads and a proliferation of airlines, it still employs 1.3 million people and runs rail catering services as well as schools and hospitals for its workers.

Tickets are discounted for passengers in 53 categories, including film technicians, members of St Johns Ambulance Brigades, research scholars, war widows, disabled people and senior citizens.

As a result, experts say India's railways are barely breaking even and safety is an issue on ageing tracks with poor signalling. This year, 52 people have been killed in fires, collisions and derailments, according to Indian media reports. "We're still using the British system and we've stretched it to the hilt," said SP Singh, senior fellow at the Indian Foundation of Transport Research and Training, a New Delhi-based thinktank.

India's newly elected prime minister, Narendra Modi, must administer painful economic reforms even though he has promised the electorate "good days ahead". The rail budget is an early test of resolve at a time when many Indians are struggling under high inflation.

In 2012, a railway minister was booted out of office by his party for raising fares.

Along with fare increases, Modi's government is considering opening up one of the country's last great state-controlled industries to foreign investment and public-private partnerships, which could turn India's distinctive if malodorous stations into something more like shopping malls.

"Reform is extremely important," said Vinayak Chatterjee, chairman of Feedback Infrastructure Services Ltd and a member of a 2012 committee on rail modernisation.

"We must retrieve the share of traffic that has moved to the roads because railways are cheaper and cleaner in terms of energy. A good rail network increases India's global competitiveness."

A report by the committee said that while the railways need at least $155bn in the next five years, improvements could contribute an additional 2% to India's gross domestic product.

Modi has promised upgrades to existing services. He recently inaugurated a "semi-bullet" train that travels at 99 miles an hour. While it is India's fastest, it pales in comparison to high-speed services in China or Japan.

There are also promises of better linen on overnight trains, more robust pest control in mouse-infested carriages, and better sanitation on a network where the faeces of more than 7 billion passengers falls on to tracks annually.

"We want railway stations to have better facilities than airports. Stations need to be modernised," Modi was quoted as saying last week as he inaugurated a new rail link to a Hindu pilgrimage site.

But the success of reforms depends ultimately on political will. In June Jaitley said: "India must decide whether it wants a world-class railway or a ramshackle one."

The answer may be more complex than it seems. Besides its million-plus employees, India's railways provide a livelihood for tens of thousands of porters, touts, scavengers, beggars, shoeshine boys and tea-sellers.

If they see modernisation as a threat to their bottom line, efforts to overhaul the system could still face obstacles.