Exploring Foreign Direct Investment in Railway Modernisation Projects in India

Abstract

Foreign Direct Investment (FDI) refers to the investment made by an external actor, business interests of another country. The article aims to examine the role of FDI in the modernisation projects in the Railways sector, using empirical and analytical approaches through the use of primary and secondary data sources. The study reveals that FDI has helped India undertake modernisation projects such as High-Speed Rail Corridors and Dedicated Freight Corridors. An essential outcome of the analysis is the need for stability in the policymaking process for attracting foreign players in the Railways modernisation projects.

Introduction

Indian Railways is the fourth largest railway network in Asia, spanning 71,457 miles, with 39,146 miles of running tracks. ¹ The Railways run 21,000 trains daily, carrying 1.3 million people and transporting approximately 1.16 billion metric tonnes of freight. It is the 9^th largest utility employer, with 1.23 million working for it. The Railway sector post-2014 has gained immense prominence under the current National Democratic Alliance rule with the coming of the Bhartiya Janata Party to power, with a thrust to projects such as High-Speed Rail Corridor and Dedicated Freight Corridor projects initiated by the United Progressive Alliance in 2008 and 2009, respectively. Under this modernisation project, the government opened the railway sector for Foreign Direct Investment (FDI) in 17 areas, such as High-Speed Rail Corridor, Dedicated Freight Corridor, Suburban Railway and Metro Railway Construction, to mention some. With the opening of railways to FDI, the government aims to attract foreign investments to the tune of $13 billion.

FDI refers to the investment made by an external actor into the business interests of another country. Foreign investment occurs when an external actor invests in establishing business units in a foreign country or acquiring foreign business assets in a foreign company (Sudha, 2013). Some of the reasons identified by the author in the article (ibid.) include the advantage of cheaper wages to labour, special investment privileges such as exemption from specific taxes, etc. FDI in India has gained prominence post-1991 economic reforms. The gross fiscal deficit of the Central government stood at 8.4% of the Gross Domestic Product in 1978 (Singh, 2014). India faced a Balance of Payment crisis, with the state finally deciding to open its markets to the international economy in 1991. This helped promote a competitive environment and facilitate the exchange of technology and expertise for a more holistic development of Indian economy sectors. In overview, the article aims to examine the role of FDI in railway modernisation project and the role of policymaking in attracting foreign investment in the railway sector by tracing the history of FDIs from the 1950s to the post-economic liberalisation period. The article also discusses the need for private train operations and the requirements for a successful FDI policy in the railway sector.

Theoretical and Conceptual Framework

The study proposed to carry out an analysis of FDI in Indian Railways on an eclectic paradigm proposed by Dunning (1980). The theory states that Multinational Corporations have competitive or ‘ownership’ advantages vis-a-vis their major rivals, which they utilise in establishing production in attractive sites due to their ‘location’ advantages. Some examples are the ability to create new technologies or coordinate cross-border activities effectively.

The study was conducted under the themes of core and non-core areas. The core areas comprised Dedicated Freight Corridor and High-Speed Rail Corridor. The social perspective emphasised the role of Dedicated Freight Corridors and High-Speed Rail Corridors in generating employment opportunities in the skilled, semi-skilled and unskilled segments. At the same time, the economic view of the study will analysed the role of Dedicated Freight Corridors in helping promote connectivity between the points of production and consumption and helping India improve its standing in the global rail freight market. The High-Speed Rail Corridor impacted connectivity and helped improve passenger traffic and revenue generation while also helping India achieve its stand in the international railway networks.

The policy and political perspective focuses on the role of the Memorandum of Understanding in helping India foster technical relations with countries established in the field of High-Speed and Dedicated Freight Corridors. The study will also helped understand the role of institutions such as the Asian Development Bank and the World Bank in developing and constructing railway projects and provide a push in the railway modernisation project.

Methodology

The nature of the study is both empirical and analytical, employing the use of primary and secondary data sources. The preliminary data comprises reports by the Ministry of Railways and interviews with railway experts in the decision-making positions. The experts included in the study are from finance, strategic planning, and policymaking in the core and non-core sectors working under specialised railway organisations executing dedicated corridors and Public–Private Partnership projects. The study also examines various press releases by the Ministry of Railways to better understand the partnerships between multiple railway systems in helping modernise the railway network.

FDI in Indian Railways Between 1950 and Present

Post-independence, India suffered significantly due to the Partition. The railways were divided between the two new nations—India and Pakistan. India initiated its first step toward indigenous development only in 1950 when the first production unit was set up as the Chittaranjan Locomotive Works in West Bengal (Bhandari, 2006).

For the first time that an external actor assisted India was in 1951; it was Switzerland in procuring technologies for the production of coaches, thanks to the efforts of the then Union Transport Minister N. Gopala Swamy Iyyengar. The Swiss technology of coach manufacturing, which led to the establishment of the first Integral Coach Factory in Chennai, marked the end of Indian dependence on Britain for its railway coaches. Subsequently, the country established the Diesel Locomotive Works at Varanasi, under assistance from the American Locomotive Company, in 1961. With the coming of economic liberalisation in India in the early 1990s and more significant opportunities for nations’ participation in building the economy, there has been greater competition amongst the countries to gain ground in the field of railways.

The post-economic reform period also entails improving connectivity and adopting the latest practices, improving the construction of tracks and improving signalling and telecommunications. With growing economic competence, the Railways inducted methods such as Public–Private Partnership (PPP) with private players encouraged by the Ministry to participate in Railway projects, mainly in the public domain. One such example is the Pipavav Port Connectivity, which is significant from the freight traffic perspective and the launch of Foreign Railway Technology Cooperation, along with revamping PPPs for improved results. The Railways are actively pursuing PPP in station modernisation, Suburban Railways, speed increment, and knowledge exchange involving the exchange of technical reports to help understand practices of the participating countries to help improve the operational efficiency.

Across the World, High-Speed Railways span over 18,511 miles across countries like Japan, China and France, carrying 1,600 million passengers annually. The government also planned to upgrade the existing Golden Quadrilateral, which connected the four major metropolitan cities, to the Diamond Quadrilateral, a network of High-Speed Rail connecting the four major metropolitan cities. This will help reduce travel time on the existing Golden Quadrilateral. The countries participating in India’s High-Speed Rail project through technology transfer include Japan and South Korea for High-Speed Railways. Japanese International Cooperation Agency (JICA) is currently aiding in the Mumbai–Ahmedabad High-Speed Rail Corridor Project. The coming up of High-Speed Railways has further given impetus to Research and Development. The Technology Mission on Indian Railways, initiated by the Indian Railways, aims to develop/research/innovation in railway technologies through domestic and international collaborations. At the domestic level, the Railways are assisted by the Department of Science and Technology, the Ministry of Human Resource Development and industry representatives.

Further, the Indian Railways are implementing Dedicated Corridor projects to decongest the existing networks where tracks are shared by both freight and passenger trains, causing massive speed differentials between the passenger and freight trains. The World Bank is more of a catalyst to helping India achieve its objectives by developing the Dedicated Freight Corridor, dotted with major economic centres comprising New Delhi, Mumbai, Chennai and Kolkata. The World Bank has provided a loan amounting to $2.725 million for constructing 730 miles of Dedicated Freight Corridors. The freight corridor will also mark an increment in the number of trains from 200 to 520 and the speed of trains from 15 miles per hour to 37 miles per hour in terms of average speed and induction of high-powered electric locomotives and rolling stock creating an additional capacity of 600 metric tons (Pangotra & Shukla, 2012).

The World Bank approved the first loan in 2011, amounting to $975 million for the Khurja—Kanpur Section and the section between Kanpur and Mughalsarai was sanctioned in April 2014. The significant contracts, including civil works and systems, have been awarded a total value of $10.3 billion (World Bank, Government of India, 2017).

FDI in Indian Railways: Modernisation Perspective

Indian Railways have consistently strived for more significant infrastructure development to help improve train operations and upgrade their ageing infrastructure and railway assets. The Technology Mission of Indian Railways, initiated by them, aims to develop, research and innovate railway technologies through domestic and international collaborations. The Railways have entered into agreements with agencies, such as the World Bank, Japan International Cooperation Agency (JICA), to facilitate financing in projects on Dedicated Freight Corridor, High-Speed Rail Corridors.

The Indian Railways have also signed Memorandums of Understandings (MoUs) with countries such as Japan, Russia and South Korea for technology transfer for constructing High-Speed and Semi-High-Speed Corridors and training personnel in High-Speed Railways. The Ministry of Railways has signed MoUs/Protocols during the last two years for technical cooperation in the rail sector with Sweden, France, Japan, Russia, United Kingdom, Slovak Republic, Kazakhstan, Canada, South Korea, China, Czech Republic and China in the field of High-Speed Railways.

This would help the countries facilitate technical visits, promote the interaction between technical experts and exchange of reports and documents related to the railway projects, and exchange training programmes, feasibility studies and pilot projects. There is also a distinction drawn in terms of management. While Operations and Management are unilaterally managed in the case of State-Owned Railways (e.g., India), there is a line of distinction drawn between the Operations and Management departments in the case of private-owned railways (e.g., Amtrak, Japanese Railways). Apart from the production units, financial institutions also play an essential role in developing Railway infrastructure.

Two financial institutions—The World Bank and the JICA—play an essential role. High-Speed Corridors will also include the Dedicated Freight Corridor, which aims to decongest the existing networks and enable the smooth flow of freight traffic, with greater hauling capacities and higher speeds of 62 miles per hour (The current speed of freight trains is 47 miles per hour) (Dash, 2021). In light of the literature mentioned above and the discussion, the present paper seeks answers to the following themes:

The role of FDI and collaboration in India’s current and future infrastructure development;

The role of Public–Private Partnership in the railway modernisation programme; and

The reason behind foreign investments in Indian Railways modernisation.

As mentioned earlier, the authors conducted in-depth interviews with experts in the domains of High-Speed Rail, Dedicated Freight Corridors, private train operations, and officials in the decision-making bodies in Special Purpose Vehicles monitoring the selected projects for the study on Railways; some of the respondents have been members of high-powered committees, some who have retired from senior positions in Railway operations and administration, etc. and asked them their thoughts on this topic. We customised the questionnaire for each expert depending upon their expertise while keeping the core research questions in focus.

Findings of the Study

The following findings are based on the interviews and the secondary sources mentioned in the methodology. The results are discussed based on the following themes:

The Role of FDI and Collaboration in India’s Current and Future Infrastructure Development

The Railway sector in India is a wholly government-monitored sector, with the policy decisions taken keeping in mind social welfare. The passenger fares in such an arrangement are kept low, while the Railways levies higher charges on the freight sector to compensate for the subsidies levied in the passenger segment. The fares are, therefore, excessively cross-subsidised.

The Indian Railways, Asia’s oldest railway network, requires extensive modernisation, with large-scale projects such as Dedicated Freight Corridor and High-Speed Rail Corridor being capital-intensive projects and executed under the modernisation programme. Therefore, the government must explore options for seeking external financing from organisations such as the World Bank, JICA and Asian Development Bank, to mention a few. There is a strong link between the Japanese and foreign currencies, unlike the Chinese counterparts in the case of securing the loan for the project owing to the stringent conditions put forth. The volatile nature of the foreign exchange can sometimes harm a financially viable project, and therefore if one is to rely solely on hedging, the interest rates are not lower than the rates currently prevalent in India. Therefore, we need to acknowledge the existence of such risks. In the current study, foreign investments from the World Bank and the JICA in the form of loans have been given with a grace period of 50 years for the High-Speed Rail Corridor and 22 years for the Dedicated Freight Corridor (ibid.).

The organisations mentioned above provided loans for constructing corridors and improving critical infrastructures such as signalling and telecommunications essential to the modernisation programme. With the reduction in monetary easing in future years, the rate is likely to increase with a possible expansion of options, which would depend on India’s growth and demand for emerging market assets with reduced demand with an increase in spread.

The Role of Public–Private Partnership in the Railway Modernisation Programme

The Indian scenario witnesses a Railway system where the maintenance and execution of infrastructure and supervising day-to-day train operations, with a lack of delegation at the highest level resulting in a lack of productivity in the task undertaken. The Indian Railways highlighted the need for massive investments in the infrastructure and safety domains of train operations with a total outlay of ₹1.61 lakh crore for 2020–2021 (Mishra, 2020), the highest-ever outlay for the railways. The government must prioritise investments and the development of infrastructure.

To improve the travel experience and provide additional services, private players must pitch in to improve the competitiveness within the Railways through private train operations currently in progress, with three trains presently operating on the Indian Railways network. Driven by competition from the existing train services and the aviation sector, as already stated, only 5% of the trains will be operated by the private players who will, in limited capacity help in promoting a worthwhile travel experience, while the government works on strengthening the core infrastructure components. Further, the government aims to operate the Kisan Trains in collaboration with private players, as announced in the 2020 Budget. The Public–Private Partnership can therefore help create a distinction between policymaking and providing services to improve train service efficiency (ibid.).

However, privatisation of the Railways is tricky as it dramatically varies, compared to airlines and telecommunications. In the case of airlines, the operators take aircraft on lease, while the infrastructure such as runway, airport and fuelling facilities for refuelling of aircraft is provided by the government, with the airline operators paying charges to the Airport Authority of India. On the other hand, in telecommunication, the players purchase the bandwidth for their respective companies through the process of bidding and are responsible for the services they provide to the consumers. In a similar situation, the coming of private players will create an oligopolistic industry exposing the consumers to the risk of exploitation

From the perspective of the Railways, the track, signalling and telecommunication, and the stations will be under government control, with no distinction of who controls the infrastructure for the private trains as both the private and government-controlled trains will be operating on the same infrastructure. On the other hand, the private players will be responsible for the maintenance of trains and provision of on-board services apart from fixing fares and stoppages and providing luggage-handling facilities. The private players will only own and operate their trains, ostensibly to meet the increasing demand for more trains. No conditionality is attached, making it imperative for them to construct new railway tracks to connect far-flung unserviced hinterlands.

Reason Behind Foreign Investments in Indian Railways Modernisation

In the course of the study, it was also found that the lack of decisive action of the Railway Ministry did not have any impact on the foreign investments being promoted in the said areas of this study. The foreign investments promoted in the proposed themes have been inducted to facilitate technology transfer, capacity augmentation, and improved speeds on Dedicated High-Speed Rail and Freight Corridors. In addition, the sole aim of investments in private train operations is to improve the passengers’ travel experience and promote a competitive environment in train operations through setting up competitive pricing of fares, providing a win–win situation for both the players and the government. Though touted as India’s ambitious project, the high-speed project has been subjected to resistance from the farmers and civic organisations because of fear of livelihood loss and displacement. It is to be understood that the farmers have an emotional bonding with their farmland and their place of residence.

Another major factor impacting the project’s pace is the compensation provided by the National High-Speed Rail Corporation Limited and the need for active engagement with the civic organisations and the affected groups. This will help them understand the ground realities of the project while also taking into consideration the project’s environmental impact and taking the necessary steps to help minimise the damage inflicted on the environment. Further, the project’s economic viability should be based on traffic studies to be taken on the proposed routes rather than being driven by political interests. The studies will help point out the chances of the project reaching a breakeven point to help achieve feasible returns on investment.

For private train operations, it is essential to delineate the areas of responsibility: with the government focusing on providing critical infrastructure and the private players to efficiently carry out train operations while promoting a competitive environment to reach out to and benefit all strata of passengers. To improve the success rate of investment inflow by foreign players, there must be a rational approach to policies formulated by considering all stakeholders’ viewpoints. ‘Make in India’ is desirable, but not much new to offer. The government’s decision to promote 100% FDI goes against the idea of self-reliance promoted by the current Modi government. In other words, it will open the ownership and operations of Railways in India to be owned and operated by foreign companies and individuals.

Conclusion

The present study was carried out with the prime objective of understanding the role of FDI in Railway modernisation through the eclectic theory paradigm proposed by Dunning which states that Multinational Corporations have competitive or ‘ownership’ advantages vis-a-vis their major rivals, which they utilise in establishing production in sites that are attractive due to their ‘location’ advantages. Some examples are the ability to create new technologies or coordinate cross-border activities effectively.

In the course of the study, it has been observed that there has been a growing interest shown by the foreign players and institutions in the Railways modernisation programme and collaborations in the manufacture of rolling stocks, locomotives, and strengthening of infrastructures such as signalling and telecommunications. The cooperation between India and other countries specialising in dedicated corridor constructions, High-Speed Rail, and private train operations will help India gain experience in new technologies to help improve the efficiency of its train operations and compete with developed railway systems globally. From the responses of the experts and academicians, the study shows a strong link between the Japanese and the foreign currency compared to the Chinese counterparts, thus bringing forth the stringent conditions with the loans granted by the JICA. Therefore, interest rates in the case of hedging are not lower than the currently prevailing rates in India. The consistent fluctuations in exchange rates may harm a financially viable project.

With the reduction in monetary easing in future years, the rate is likely to increase with a possible increase in speed, which would be dependent on India’s growth and demand for emerging market assets with reduced demand with an increase in spread. Further encouraging foreign investments in the Railway sector may go against the government’s idea of self-reliance by completely opening the Railway sector to be controlled by foreign companies and individuals. Therefore, such risks need to be acknowledged.

However, the study also pointed out the need for active engagement with the stakeholders and affected groups to prevent any stalling of projects and cost overruns. Further, the need for a stable government and stable policies are instrumental to strengthen the confidence of the investors in the Railway sector, failing which the chances of lower foreign investments become imminent with initiatives such as Make in India, providing a platform for investors to showcase their technology and facilitate technology transfer in the modernisation processes.

Limitations of the Study

In the process of the study, some limitations faced by the researchers are mentioned below. Since certain information related to the Railways’ infrastructure and decision-making process was confidential, most respondents were unwilling to share the information or elaborate on the points they mentioned. The researchers also realised that the data for the current status of the projects earmarked for the present study were either not updated or were not available online for rapid access. Since the COVID-19 situation and lockdown did not allow for face-to-face data collection, this hindered the study since the researchers lost out on meaningful one-on-one discussions with the respondents, which could have added a richer flavour to the analysis. Another limitation was the limited literature exploring the role of FDI in Indian Railways.

Scope for Further Research

The present study has attempted to explore the challenges posed by the Dedicated Rail Corridor Project in the backdrop of social and economic challenges posed due to resistance from the locals due to the fear of displacement and loss of land and the capital-intensive nature of the projects. The study also examined the role of FDI in the Railways modernisation project, the impact of Public–Private Partnership in the Railway modernisation project, and how the policymaking process plays a crucial role in attracting foreign investment in the Railway sector. However, there are still various avenues to explore the current Public–Private Partnership in Indian Railways and its role in helping modernise not only the Railways network but also understand the impact on the railway modernisation programme. Further understanding of the role of the High-Speed Rail Corridor in promoting greater cooperation and its impact on the overall modernisation programme can be taken up in detail in future research works.