The Cabinet on Monday approved the setting up of a Rail Tariff Authority to advise the railways on passenger and freight rates.
In August 2013, the Cabinet had given an in-principle nod to set up the authority and sent a draft note to the railways, to be discussed with the law ministry.
After talks in this regard, the railways had sent the proposal back to the cabinet for changes and clarifications.
The authority will be a five-member body.
The selection committee will comprise the Cabinet secretary, chairman of the Railway Board, the finance secretary and an expert on railways.
Such an authority, whose orders on passenger and freight rates will be binding on the government, can only be set up after seeking an amendment in the Railways Act, 1989.
The authority, mooted by member of parliament from the Trinamool Congress and former railway minister Dinesh Trivedi in Railways Budget 2012-13, was pursued by his successors C P Joshi, Pawan Kumar Bansal and incumbent Mallikarjun Kharge.
The Cabinet also approved the setting up of an electric locomotive factory at Madhepura, Bihar, at an estimated cost of Rs 1,294 crore (Rs 12.94 billion).
A proposal to set up a diesel locomotive factory in Marhaura, Bihar, at a cost of Rs 2,053 crore (Rs 20.53 billion) was also cleared.
The two factories will be set up as joint ventures and the locomotive manufacturers will be selected through international competitive bidding.
The bids will be finalised within six months.
Through 10 years, the factories will provide the Indian Railways 800 electric locomotives and a mix of 1,000 diesel locomotives.