Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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The Bullet Train Ecosystem

In India, the only sensible way to look at bullet trains is to treat them in parallel with urgent reforms needed in the railways sector

Is spending rs 1,10,000 crore on a bullet train a waste of money? Worse, does it indicate the government’s flawed sense of priorities? The Mumbai-Ahmedabad bullet train has been criticised on both counts. Former Finance Minister P. Chidambaram has been especially scathing. How valid is the criticism? Not very. Consider three key ingredients of the Mumbai-Ahmedabad bullet train project:

One, it is virtually free. Around 80 per cent of its cost is financed by the Japan International Cooperation Agency (JICA) at a nominal annual interest rate of 0.1 per cent. On a staggered JICA loan of Rs 88,000 crore, the interest outgo will be a mere Rs 88 crore per year. More-over, there is a 15-year moratorium on the 50-year repayment period. Adjusted for inflation, the real cost of repaying the principal loan amount beginning in the 2030s would have depreciated to a fraction of the original cost. Repayment over 35 years after the 15-year moratorium would amount to a heavily depreciated Rs 2,500 crore a year. Assuming a modest average GDP growth rate of 6 per cent a year for the next 50 years, India’s economy will double every 12 years. Doubling four times over 48 years, GDP would therefore, at $40 trillion, be 16 times the current level of $2.5 trillion when repayments of a mere Rs 2,500 crore per year end in the 2070s.

Two, a crucial aspect of the bullet train project is the ecosystem that will grow around it. The 508-km Mumbai-Ahmedabad route will generate economic activity, create jobs, promote ancillary industries and boost trade between Mumbai and other key commercial cities along the route: Surat, Vadodara, Bharuch and Ahmedabad.

Three, the bullet train project will introduce next-generation rail technology in a country still largely wedded to creaking colonial-era railways infrastructure. Nearly half of India’s gargantuan railways network is not electrified. New technology is only now slowly seeping into the railways ecosystem with the Rajdhani now completing the Mumbai-Delhi run two hours quicker following technological tweaks.

The introduction of air-conditioned trains early next year in Mumbai’s ramshackle suburban railway system is another innovation. It will not only make a traumatic city commute bearable but sharply cut passenger fatalities caused by overcrowding in open-door suburban trains.

Despite its technological advantages by a process of osmosis, bullet trains are regarded as economically unsound. They rarely make money for their operators. While Japan, France, Germany and, more recently, China have embraced bullet trains, the US and Britain have not. Capital costs are high and ticket prices uneconomical. Bullet trains work best in countries like Japan and France though China has shown that they adapt well to large distances as well.

In India, the only sensible way to look at bullet trains is to treat them in parallel with urgent reforms needed in the railways sector. Indian Railways has, for far too long, been used as a political tool. Former Railway Ministers such as Lalu Prasad Yadav and Mamata Banerjee made the Railway Budget an instrument to curry favour with their constituencies in Bihar and West Bengal, respectively. Uneconomical train routes were inaugurated for political reasons. Corruption in the railways bureaucracy was rife. Catering standards were abysmal. Derailments and accidents became common.

Former Railway Minister Suresh Prabhu tried to reform the ministry but met with limited success. His successor, Piyush Goyal, who revitalised the power sector in his previous assignment, now has the formidable task of wringing change in what is India’s largest employer. Indian Railways carries 23 million passengers every day in 10,000 trains across the country besides freight. That is equivalent to transporting the entire population of Australia — daily. It will need all of Goyal’s ingenuity to fix Indian Railways’ schizophrenic problem: launching a world-class bullet train project while simultaneously lifting a sprawling railway system out of the 19th century and into the 21st century.

Goyal would do well to seek the counsel of Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council and minister of state (MoS)-level member of Niti Aayog, who knows more about Indian railways than most. Debroy authored a seminal report on reforming the railways, including privatising railway stations and cutting the bloated railways’ bureaucracy.

The Railway Board constituted a committee, chaired by Debroy, to mobilise resources for major railway projects and restructure both the Railway Ministry and the Railway Board. Here is what the Debroy Committee report recommended: “One of the key reasons for the failure of private participation in Railways is that policy making, the regulatory function, and operations are all vested within the same organisation, that is, the Ministry of Railways. The Committee recommends that the three roles must be separated from each other to have sustained and large scale private participation. Railways’ monopoly discourages private sector entry into the market. Second, schemes for private sector participation are not prepared with the involvement of stakeholders. Third, the schemes are designed such that the risk lies mostly with private parties.

“In order to create a level playing field for private players in the sector, the Committee recommends setting up an independent regulator, the Railways Regulatory Authority. The regulator will be a statutory body, with an independent budget and independent of the Ministry. While it will not determine tariff, it will monitor whether the tariff is market determined and competitive. An independent regulator for Railways is also necessary because of the technical and specialised nature of the sector.

“Financing of Railways is challenge because: (i) Investment is made in projects that do not have traffic and hence do not generate revenue (ii) The unbalanced mix of passenger and freight traffic does not help generate revenue (iii) The efficiency improvements do not result in increasing revenue and (iv) Delays in projects result in cost escalation, which makes it difficult to recover costs. Railways has also been mostly financed through internal resources and budgetary support, and not through external resources. Thus there has been no financial oversight of its projects.”

Goyal is known to be a reformist who works swiftly and transparently. If there is anyone who has a good shot at turning Indian Railways around at bullet train speed, he does.

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Magazine 25 November 2017

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