Role of external financing in Indian Railways

Chitresh Shrivastva, Railway Policy Analyst

Since Independence, Indian Railways has undergone tremendous, yet significant changes impacting its holistic growth leaving both positive and negative imprints. But what remains constant is the role of the government in maintaining the operations of the railways in a global economy with greater focus on the railways, which can be assessed by looking at the technology and infrastructure investments at domestic and global levels.

Railways, around the word, like in the United States, have undergone changes in ownership. But, Indian railways and other railway networks in the southern hemisphere, mostly the developing countries, continue to be monitored by their respective governments. Indian Railways is a social institute saddled with liabilities owing to social obligations pegged at Rs 38,000 crore, and subnormal revenue generation given increase in variable costs.

These include staff wages with the implementation of the Seventh Pay Commission, increase in both diesel and electric fuel costs and safety costs, integral to railway operations globally. Under such circumstances, it is not just impossible but also irrational to believe in the government to manage the project costs on its own without external support. Let’s understand the growing prominence of external institutions such as World Bank and Japan International Cooperation Agency in helping the government supplement its efforts to establish projects with a global outlook poised at improving the position of the Indian Railways.

Before moving to the core of the discussion, it is essential to assess the growth in domestic investments over the last five years — during the first tenure of the Narendra Modi government.

Despite the rapid succession of the Railway Ministers, the government has had a positive outlook towards the growth of railways with a greater focus on the core operative area, which forms the backbone of the railways.

The government, having realised the fundamentals of an efficient railway operation, undertook strategic projects aimed at improving the infrastructural health. The primary element being the large network of railway tracks, much of which have depreciated over the years.

The Ministry of Railways had decided to repair the tracks under a maintenance drive since the number of train accidents were going up. The expenditure on track maintenance and new line construction saw a 21 per cent increase in the fiscal budget of 2015-16.

However, beyond the infrastructural costs, the movable asset costs are also to be examined. This can be broken into three components:

1) Locomotives 2) Carriages and wagons (Freight) 3) Rolling stock

The induction and maintenance costs of the locomotives saw an increase of 15 per cent between fiscal years 2015-16 and 2017-18.

The cost rose to Rs 6,204 crore in 2017-18 from Rs 5,273 crore in 2015-16, while the freight carriages and wagons and rolling stock when combined together saw a 21 per cent increase in expenditure — Rs 27,057 crore in 2017-18 from Rs 22,352 crore in 2015-16.

Also, fuel expenses accounted for approximately 7 per cent of the total expenditure incurred by the railways, which can be inferred as a meagre increase in costs. The government focused majorly on electrification, for which it came up with a two-pronged strategy of lowering fuel cost and increasing speed.

The current government, in its first phase, saw a drastic shift from a populist to a more policy-oriented approach. It aimed at achieving a more capitalistic approach through greater focus on foreign direct investments and promoting technological cooperation with companies like Japan, America, France and Spain.

Although the initial collaboration with Spain did not take off as anticipated, India still strengthened its collaboration with Japan, America and France while rectifying and prioritising its approach at the domestic level.

The increased focus of the government on gauge conversion boosts expansion of railway network and undertaking of eco-feasible projects. These include electrification and subsequent undertaking of suburban and metro projects, which form a micro part of the larger policy-oriented approach.

The resultant policy saw an approximate increase of 14 per cent to Rs 31,316 crore from Rs 27,081 crore. There has been an ever-growing need for greater investments in railways, given the turbulence in the aviation market driven by domestic and international factors, with an approximate 40 per cent increase in the railway budgetary support — Rs 66,786 crore.

This budgetary support is insufficient for large magnitudes of development of railways and can be hurtful to the railways in the long run, given the need for rehabilitation of current long-term investments in infrastructure upgradation.

The Indian Railways contributes to 2.9 per cent of the country’s gross domestic product (GDP). Since there’s generous government support for railways, the need of financial institutions to fund railway projects must be questioned in line with domestic contributions for capital intensive projects, which the government alone cannot bear.

Growing research and development costs and developing the railways in the presence of subnormal fares and growing investments make sustenance a difficult affair in the current setting.

India is poised to create its position amongst the global railway systems. Therefore, it needs external cooperation and collaboration. Some of the notable investments made in the direction of Indian railways are as follows: India has signed Memorandums of Understanding (MoUs) with countries like Sweden, France, Japan, Russia, United Kingdom, Slovak Republic, Kazakhstan, Canada, South Korea, China, Czech Republic and China to facilitate technical visits for better understanding of the Indian and global environment, accumulate knowledge from experts and get access to technical documents and reports and implementation training programmes, feasibility studies and projects.

These are capital-intensive investments for upcoming projects aimed at improving the domestic fuel economy of the railways, while boosting expansion and assets such as rolling stock, construction of train sets and increasing production of Linke Hofmann Busch (LHB) coaches under the Make in India programme.

This will mark a new era in inculcating self-sufficiency and adopting innovative practices in safety improvements while improving train operations and efficiency. Let us take into consideration the two most trending projects on the Indian Railways — dedicated freight corridor and high-speed rail corridor, which has invoked the interest of the World Bank and Japan International Cooperation Agency. They act as links between countries and potential technology partners helping the railways meet technology and policy obligations.

This is more important as the increasing environmental liabilities pushed the railways to pursue projects that provide smart commuting solutions and participation of the Asian Development Bank, a relatively new entrant and an emerging partner in funding suburban rail projects, will help streamline connectivity.

The mushrooming of metro rail networks is also an essential indicator of technical standing of domestic railways beyond mainstream railway projects. The initiative, however, comes with its drawbacks.

The developing countries are heavily dependent on these financial institutions, directed by the clauses of these institutions and complemented with increased liability of loan repayment.

This, therefore, calls for introspection by governments of developing countries so they undertake projects through every ounce of reasoning and priority to attract investments that are rational, endow sustenance in the long run and withdrawal of unviable policies in both core and non-core fields.

While in the international political economy, we hail the role of monetary institutions, it is to be understood that the institutions only help provide monetary support, while those investing in the assets get with modern technologies and help build hauling capacity of the railways. This improves railways’ financial standing and modernises the network.

(Courtesy: Chitresh Shrivastva is a Railway Policy Analyst. Views expressed are the personal)