WHAT pretends to arrive as a gift and comes with great fanfare can only be a curse. Prime Minister Narendra Modi’s dream project to bring home India’s first high-speed train—given the dilapidated state of the Indian rail network—has the hallmark of an ill-fated gift.

Modi and his Japanese counterpart, Shinzo Abe, formally launched the project to introduce the Shinkansen—popularly known as the bullet train—between Sabarmati and Mumbai on September 14. The commencement of work on India’s Shinkansen—the global pioneer of High Speed Rail (HSR) in 1964—was greeted with the euphoria that India had gained entry into the exclusive club of nations with an HSR. The project for the 508-kilometre line is expected to cost Rs.110,000 crore—at the rate of Rs.217 crore per km. But there are no worries, said Modi that day.

“In a way the project is virtually free,” Modi gushed, referring to the fact that the Japan International Cooperation Agency (JICA) would be providing a loan of Rs.88,000 crore for the project at a “nominal” interest rate of 0.1 per cent per annum. Moreover, the repayment schedule, spread over 50 years, including an initial moratorium of 15 years, gave the project an almost-free ring. “In Shinzo Abe, India has found a friend no bank in the world could match,” Modi bubbled over enthusiastically. Modi’s sales pitch on the eve of the Navaratri festive season hid more than it revealed, for several reasons.

For one, the JICA is well known to hunt the world, scouting exclusively for projects in which Japanese companies are bidding. A veteran who has worked at senior positions in two leading global consultancies told Frontline that agencies such as the World Bank view the JICA with some scepticism. “The JICA generally funds projects in which Japanese companies are in the fray and there are often hidden costs associated with the services they provide,” he said. Moreover, the fact that India’s first bullet train project has been awarded on a “nomination basis”, without a competitive bidding process, is clearly out of order. The no-bid route is obviously costlier and it is possible to find out—at least approximately—how much more India is paying for the “almost free” largesse from Japan.

The illusion of ‘almost free’



A report on China’s HSR programme prepared by the World Bank’s Beijing office in 2014 provides just such a yardstick for comparison. Although no two projects are strictly comparable because of the specificities—particularly topographical—of each case, the Rs.110,000-crore project implies a cost $16.998 billion at exchange rates prevailing on September 21. This implies a per km cost of $33.46 million. According to the World Bank report, the per km cost in China was between $17 million and $21 million. Thus, at the lower bound of the Chinese costs, the Indian project is 59 per cent higher; at the upper bound, the costs are higher by a whopping 97 per cent.

These calculations show that if the Chinese costs are treated as a base case, India is paying between $6.330 billion and $8.362 billion more for the project. Even discounting for the fact that the Chinese cost estimates pertain to three years ago, these appear high by any standard. Moreover, there is evidence to show that Chinese costs have been continuously declining, primarily because of the tremendous economies of scale that it has gathered in the short period of 14 years since it started its HSR programme (see separate story). In effect, even if the loan is almost free because of the illusory effect of the low interest rate, it appears that the high project cost has front-loaded returns for the Japanese companies implementing the project.

But the negative interest rate in Japan, a crucial result of “Abenomics” since Abe came to office in 2012, implies that even a 0.1 per cent rate of interest is profitable for Japanese banks. The fact that a loan such as the one extended for the Indian bullet train project expands business opportunities for Japanese companies is an obvious additional gain. But the real benefit from the loan will not accrue from the rate of interest charged to the Indian Railways’ subsidiary that would be implementing the project, but from the exchange rate between the rupee and the Japanese yen.

A financial analyst with some understanding of Japanese banks and corporations told Frontline: “The long-term tendency is for the rupee to depreciate with respect to the yen, given the experience that the Japanese currency has appreciated by about 60 per cent in the last 10 years.” He pointed out that one of the key determinants of a market-determined exchange rate, apart from capital inflows and outflows, is the inflation differential between the two economies. Given that the Japanese economy has been in prolonged stagnation, nearing a condition of deflation, and that Indian inflation is still high, the prognosis is for the rupee to depreciate in the long term vis-a-vis the yen. Significantly, the market’s perception of what is the “true” level of inflation would not be coloured by what official Indian statisticians may compute. With inflation targeting in Japan under Abe currently at 2 per cent and Indian inflation even assumed conservatively at 6 per cent, the difference works out to be significantly higher than what has been presented by Modi.

Thus, it appears fair to conclude that what the Japanese may appear to lose because of the apparently low interest rate would be more than compensated by the depreciation of the rupee. In effect, India would have to pay more rupees for the yen it has borrowed for the project now. The inflated cost of the project is the icing on the cake for the Japanese companies getting their foot in the door through a no-bid contract.

Modi’s acolytes have made the suggestion that India could hedge against an appreciation of the yen and therefore avoid losses in the future. This apparently ingenious suggestion is not only irresponsible but suggests an utter lack of understanding of either the market for the Japanese currency or the way hedging works. Many Indian companies, including IT services companies, which have fairly large exposures in foreign currencies, regularly do hedging. But no company hedges its entire exposure simply because hedging costs can be fairly high, apart from posing downside risks. The financial analyst quoted above pointed out that hedging costs for the yen are generally higher than, say, for instance, the U.S. dollar, because the yen is the most volatile of major international currencies. In addition, he pointed out that hedging on the yen is typically done for a period of six months. He guffawed loudly when asked about hedging on a yen-denominated loan with a tenure of 50 years.

Misplaced priorities



Modi’s dramatic move to usher India into the high-speed age could not have come under more ironic circumstances. The recent spate of railway accidents and the incessant reports of derailment of trains have cast a gloomy shadow over his bullet train ambitions. In 2016, the Indian Railways recorded 186 fatalities, the worst year in almost a decade. Since Modi assumed office in 2014, despite three Railway Ministers, there have been 325 deaths compared with 85 in the three-year period before this. The question that sceptics are asking is: why is this expensive project being pursued when the entire railway system in all its dimensions is in utter decay, particularly because of long-term neglect of its basic infrastructure?

Not all of these sceptics are Luddites objecting to such a project simply because they are against new technology. In fact, many critics of the project agree that increasing speed on the Indian rail network is a desirable objective because it increases throughput on tracks, which increases the overall efficiency of the system. The average speed of a goods train in India is about 25 km/hr and that of an express train is about 50 km/hr. What could be the objection to increasing these speeds which Indian trains have been at for decades now? Last year, Gatimaan Express, from Delhi to Agra, which had the ability to reach a top speed of 160 km/hr, was actually only a few minutes faster than the first Shatabdi Express that travelled from Delhi to Jhansi via Agra in 1988!

The constraints on speed arise from two sets of factors. The first pertains to the state of the tracks, signalling equipment, passenger coaches and goods wagons, all of which are either over-aged, outdated or simply unsafe to run at speeds that would be considered normal in a modern rail system. The second kind of constraint on speed arises from the excessive load and congestion on Indian tracks. In a recent interview on TV, Bibek Debroy, who headed a committee to restructure the Indian Railways, said traffic in the northern to eastern corridor was so dense that railway personnel did not get “even five minutes to do maintenance work on tracks”.

Speaking to Frontline, K. Balakesari, former Member, Railway Board, said: “Statistically speaking, it may be impossible to predict the number of fatalities in the Railways, but the incidence of derailments, even when there are no deaths, is definitely a matter of concern because they are a warning that something is wrong in the system.” The problem has been aggravated by the fact that since Lalu Prasad’s tenure as Railway Minister a decade ago, the Railways started loading wagons beyond their prescribed carrying capacity. This has continued ever since. “Has there been a study of what happened to these assets as a result of rampant overloading?” Balakesari asked. He also pointed out that in about 70 per cent of rail accidents, the blame was put on the staff. “There is something seriously wrong in putting money on infrastructure and then blaming the staff,” he said. He suggested that the severe stress on the overloaded rail system had also imposed severe stress on the railway staff who were under great pressure to deliver. This “human aspect” of safety is not adequately appreciated, Balakesari said (see interview highlighting the plight of Indian loco pilots).

A Task Force Report on Safety published in January 2017, meant for “internal circulation” but which is available with Frontline, thanks to a trade union source, paints a picture of all-round neglect. Not just tracks, but even passenger coaches need wholesale replacement, it observed. For instance, the Integral Coach Factory (ICF)-type coaches, the mainstay of passenger services for several years, are prone to telescoping on impact following a collision, and needed to be replaced years earlier; it was only in late 2016 that the Railway Ministry finally decided to banish them from service. Even their replacement, Linke Hofmann Busch (LHB) coaches, are almost a decade old, but there are no attempts to replace them with better, modern, light coaches based on research and development within the country. A Railway source confirmed that little or no action had been taken on the several recommendations made by the Task Force.

Dinesh Mohan, Volvo Chair Professor Emeritus at the Transport Research and Injury Prevention Programme at Indian Institute of Technology Delhi, told Frontline that the fundamental question was one of the Railways’ priorities. “You can go to any railway station in India and see especially poor people sleeping on the platforms, and the areas around railway stations are horrible.”

Railway compartments, he said, “are filthy and jam-packed, with people travelling like animals. Is this how we treat millions of our people who travel every day to our factories and farms?” If these issues were addressed, or at least being addressed in good measure, nobody would object to the introduction of HSR in India, he said.

Dinesh Mohan, a regular traveller to China for the last three decades, said: “In 1988, when I first went to China, the stations and trains were cleaner and services much better than what we have in India today.”

“The Ministry of Railways in China has established three research institutions, each employing 3,000-5,000 research personnel,” he pointed out. Apart from these, at least 10 universities have centres of excellence in railway-related studies, he said. “In China, all this was achieved over the last 20 years, but in India we do not have a single institution that employs 100 persons doing railway-related research. China has at least 15,000 such professionals,” he observed. No research institution, university or even an IIT specialises in railway technologies, he remarked.

Gross underinvestment



As the accompanying piece by R. Elangovan, a trade union leader and a keen student of the Indian rail system for several years, observes, systematic underinvestment in every aspect of the system has brought it to the brink. Strikingly, data show that the biggest phase of decline in derailments occurred in the period between 2003 and 2008 when investments in track replacement were undertaken. Since then progress has flagged; the problem has been compounded by the persistent and egregious flogging of national rail assets. While government investment has been cut, the dependence on public private partnerships (PPP) as a route to salvation has proved to be misplaced and costly. In fact, Finance Minister Arun Jaitley’s last Budget papers revealed that most of the planned investments failed to materialise because they were to come through PPP.

The example of the progress on the two dedicated freight corridors—the Eastern Corridor between Ludhiana and Dhankuni in West Bengal and the Western Corridor between the Nhava Sheva port (Mumbai) and Dadri in Uttar Pradesh—illustrates all that is wrong in terms of priorities. The Eastern Corridor is to traverse a length of more than 1,500 km, mainly for transporting coal and steel. The Western Corridor, extending over a distance of 1,856 km, is mainly for container traffic. The two projects were sanctioned in 2006 amid expectations that, upon completion, they would divert 55 per cent of freight traffic from existing lines, which would help in relieving the severe congestion in the rest of the network. The projects were initially conceived in PPP mode, but they failed to materialise, at which point the World Bank and the JICA stepped in to fund the two corridors. According to the Railway Minister’s admission in Parliament earlier this year, only 29 per cent of the finances for the project has been released and only 26 per cent of the work has been executed. The tardy progress raises a disturbing question: what is the point of running one train at a great speed over 508 km when 110,000 km of the Indian rail network is crying out for attention?

Railway Minister Piyush Goyal whose tenure began recently—and was welcomed into office with several more derailments—has defended the project by ingeniously arguing that the project is separate from the Indian Railways’ “normal” operations. He has assured that investments into the railways would continue apace despite the bullet train project. That may have been plausible before Jaitley took control of rail finances, following the Debroy Committee’s recommendation that a separate Railway Budget—condemned as a vestige of a colonial practice—be dispensed with. The fact that all funds, whether for the Railways in general or for the bullet train, will come from the same source renders this logic vacuous.

Is it viable?



It is remarkable that so little information is available about this marquee project. So far, no financial viability report appears to have been prepared. This is indicated by the fact that we still do not know where the train would stop between Sabarmati and Mumbai; nor do we know what the fares are likely to be. But the ballpark figures suggest that the fare would have to be in the region of Rs.5 per km, which implies that the fare between the two terminals would cost at least Rs.2,500. A quick check at an airline booking portal reveals that a flight between Ahmedabad and Mumbai ranges between Rs.1,900 and Rs.2,500, which implies that the bullet train fares would not be competitive vis-a-vis air fares.

Of course, stoppages en route would improve the train’s catchment from cities and towns not connected by air. But there is a catch here too: stoppages at intermediate stations would mean that the average speed of the train would come down significantly, which would result in making it unattractive for travellers from Mumbai and Ahmedabad who have the airline option.

In a country where even the Shatabdi intercity trains are mainly preferred by business travellers because of their higher fares, it stands to reason that the bullet train may largely appeal to this same class of passengers. But if the journey time between Ahmedabad and Mumbai is about two and a half hours, and if those travelling on work need to reach an office, there is only a small window of time available for the bullet train to satisfy this segment of demand—say, between 5-8 in the morning and about 6-9 in the evening. What would this expensive toy do during the rest of the day?

As Balakesari points out, there is no such thing as a “viable” HSR project, simply because the capital costs are so huge. Nowhere in the world have such projects generated financially profitable investments, nor are they likely to in the foreseeable future, unless they are supported by funds provided by the state. This is not to say that HSRs are not desirable simply because they cannot generate short-term financial profits. As China has shown, the gains from lumpy investments in such projects may accrue in other realms. These could be in terms of positive environmental benefits and socio-economic benefits that reduce regional disparities or by simply making the overall economic system more efficient.

It appears that India, in exploring its options, would have done better than to jump at the Japanese “almost-free” gift by exploring the possibilities of collaboration with China. It could have done even better by learning what China did before it undertook its massive HSR programme. Instead, Modi appears to have favoured the optics of the spectacle that the Japanese embrace offered over durable, long-term gains.