New policy on FDI will benefit cash-strapped Indian Railways

S N Mathur, Aug 14, 2014 :

India owns the fifth largest rail network after the US, Russia, Canada and China.

 However, it is lagging behind the others in overcoming capacity constraints, and keeping pace with technological improvements. In the 66 years since Independence, India has added only 13,000 km of new railway line. As reported  by the Ernst & Young,  only 1,750 km of new lines were added by India  between 2006 and  2011, compared to 14,000 km  by China during the same period. Consequently, Indian Railways has failed to keep pace with the rapid rise in traffic and has lost its dominance in the transport sector, especially in the movement of goods traffic.

Years of under-investment have led to creeping inefficiencies in the functioning of the Railways. Its safety record has also been dismal. Hence, there is an urgent need to enhance the capacity and modernise its infrastructure. An expert group on Modernisation of Indian Railways, constituted a couple of years ago, had suggested ways  to modernise Indian Railways to meet the challenges of economic growth and the need to introduce changes in technology. Its recommendations included modernisation of 19,000 km track, introduction of high speed trains and heavy haul freight bogies, construction of dedicated freight corridors, automatic signalling on important routes, setting up real time information system, strengthening of 11,250 bridges and attracting private investment for freight terminals. The total funding requirement for implementation of the committee’s report was estimated to be over Rs. 8 lakh crore spread over a period of five years.

The Planning Commission, though concerned over the deteriorating state of railway infrastructure, is also not able to provide the requisite budgetary support because of the fiscal constraints of the Central government. As against the 12th Five Year Plan outlay of Rs. 5,19,221 crore for the Railways,  the Gross Budgetary Support was approved  for Rs. 1,94,221 crore, but for the first two years of the Plan the allocation was restricted to about  25 per cent of the committed  sum,  which  only served to highlight the resource crunch of the government itself. The shortfall in internal generation by the railways was even more stark, while the funds to be mobilised through private sector participation have been woefully insignificant, compared to the ambitious Plan allocation of Rs. 1,00,000 crore. Market borrowings through the Indian Railways Finance Corporation also has its limitations, and has had to be scaled down from the budgeted figure to a more realistic target for the year 2014-15.

Railways’ market share in the goods movement was as much as 65 per cent in 1986-87, but today it has been reduced to a meagre 30 per cent, while the share of road sector has gone up from 34 to 60 per cent during this period.  Compare this to the road share of 44 per cent in the United States and 22 per cent in China. This shift of freight and passenger traffic to roads has led to a substantial loss of revenue to the railways. For the economy as a whole, it means higher economic and environmental costs. The inter-modal mix needs to be restored urgently.

Boost to business  

 The Department of Industrial Policy and promotion (DIPP) has been pushing for allowing FDIs in railways since August last year. Currently, FDI is not allowed in railway transport other than mass rapid transport systems. Last Wednesday, the cabinet took a significant step by approving Railways’ proposal to allow 100 per cent FDI in several other areas as well. FDI participation will now be allowed in projects relating to electrification, high speed tracks and suburban corridors.

Foreign companies will also be allowed to pick up 100 per cent stake in the special purpose vehicle that will construct and maintain rail lines connecting ports, mines and industrial hubs with the railway network, providing first-to-last mile connectivity to ensure smooth movement of goods from the source loading point to ports, and thereby giving a boost business activity in and around ports and mines. Other areas that can be covered under FDI are the dedicated freight corridor, passenger and freight terminals, signalling installation and maintenance of rolling stock.

Massive funding will be required for completion of the already sanctioned railway projects. A review carried out by the Planning Commission late last year revealed that as on January 2013 an estimated Rs. 1,47,188 crore was needed for completing such identified projects. These exclude some major   projects relating to electrification, freight corridors and redevelopment of railway stations.

These are highly capital-intensive in nature, and, as the railway minister Sadananda Gowda has rightly stated, their cost cannot be met only through increasing passenger fares and freight rates. There is, therefore, urgent need to garner additional funds so that the railways can expand its freight network, and improve the reach of its passenger services. This is where FDI can step in to fill the vacuum. It is estimated that the move to inject FDI in railways could attract up to $ 10 billion of foreign investment over the next five years and can at the same time add up to 1.5 per cent of GDP.

There are already indications that large manufacturers of rolling stock and track equipment such as Canada’s Bombardier, General Electric of the US and Germany’s Siemens have shown interest in investing in India. Chinese companies and Japanese manufacturers that have already supplied hi-tech equipment to the railways are other potential investors. This can give a fillip to the public-private-partnership in railways that has failed to take off so far.

A note of caution, though. The FDI inflows into all infrastructure sectors   in India have been showing a sharp decline in recent years, chiefly because of regulatory uncertainties, and unacceptable delays in project approvals and land acquisition processes. A stable legal and regulatory framework, along with a friendly bureaucratic environment should therefore be put in place  first. Only then can the railways expect   that sufficient volumes of FDI inflows will materialise in quick time.

(The writer is former managing director, Indian Railways Finance Corporation)