FDI in rail will boost GDP growth by 1.5-2%

New Delhi: The government’s move to allow foreign investment in creating rail infrastructure was based on its belief that the department’s current model is “unsustainable” and leaves “little” for “modernization”, and its hope that such modernization could “be a significant engine of inclusive growth and development for the country and can potentially contribute an additional 1.5 -2% to GDP (gross domestic product),” according to the background notes on the decision viewed by Mint.

On Wednesday, India’s cabinet cleared a proposal to allow 100% foreign direct investment (FDI) in railway infrastructure, barring operations. The move, in keeping with the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government’s agenda to push through changes that can spur activity in the infrastructure sector and the economy, will not allow foreign firms to operate trains but pretty much allows them to do everything else, including creating the network and supplying the trains for the bullet trains often referred to by Prime Minister Narendra Modi.

Indian Railways simply doesn’t have the money to do this. The railways reported an operating ratio of 93.5% in the last fiscal. The ratio is a measure of operating expenses as a percentage of revenue.The railways’ surplus over expenses fell to just Rs.602 crore in the same year.

The much-touted PPP, or public-private partnership, model—private firms investing in creating public infrastructure that they can monetize through a toll or a charge—hasn’t worked for Indian Railways which is far from achieving the target of generating Rs.1 trillion in the 12th Five-Year Plan through PPP for rail infrastructure projects.

The government has cleared the proposal to amend the FDI policy to expand the activities and sectors for private sector investments in Indian Railways to include suburban corridor projects through PPP, high-speed train projects, dedicated freight lines, locomotive and coach manufacturing and maintenance, electrification,signalling systems, freight terminals, passenger terminals, infrastructure in industrial parks pertaining to railway line and sidings and mass rapid transport systems, the note said.

Manish Agarwal, leader, capital projects and infrastructure, PwC India, said: “The opening up of FDI in railways indicates the government is moving forward on its plan of developing PPP structures, as was announced in the budget.”

But it will be tougher to structure complex projects such as building suburban rail and high-speed rail networks. These “will continue to require significant budgetary funding and, hence, structuring PPPs for FDI to supplement government funding can be complex and will take time,” Agarwal said.

Sidharth Birla, president of industry lobby group Federation of Indian Chambers of Commerce and Industry (Ficci), said: “This overdue measure has happened at a time when the existing rail network and Indian Railways need funds to modernize and expand capacity to serve fast-growing needs of the economy. It will help railways in mobilizing investments required for introducing high-speed trains, suburban corridors and dedicated freight line projects through PPP.”

The proposal to open railways for FDI was first announced by the earlier United Progressive Alliance government in December 2012.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.