Railway Ministry said last week it wouldn't need diesel after all — hoping to save on fuel and maintenance costs — and suggested GE might want to make electric engines instead.

Surprise policy shifts, such as an apparent U-turn over a locomotive deal with General Electric (GE), risk undermining Prime Minister Narendra Modi's flagship 'Make in India' initiative, which aims to create millions of jobs and boost growth, industry executives say.

GE won the $2.6 billion contract in 2015 to supply 1,000 diesel locomotives — the biggest direct investment in India by a U.S. firm and the first deal awarded to a foreign firm after India allowed 100 per cent foreign investment in railways - part of efforts to overhaul its creaking, colonial-era infrastructure.

But the Railway Ministry said last week that it wouldn't need diesel after all — hoping to save on fuel and maintenance costs — and suggested GE might want to make electric engines instead.

No sudden changes in policy: Piyush Goyal

However, Union Railway Minister Piyush Goyal on Thursday said “Our government does not make sudden changes in policy. We take considered decisions in the interest of the country. Electrification is a process going on for years. I hope to take it to next level in the days to come.”

On reports of the government ending GE contract for the diesel locomotive plant in Bihar, he said:

“I would urge all of us from restrain from knee-jerk reaction on reporting on internal discussions without any official communication.

“Work on GE factory is going on as per the plan. In view of the thrust to address concerns of pollution and climate change, going in for electrification of the railways is in the interest of the country.

“We have had fruitful discussions with the GE. We have discussed export opportunities as well. We have also discussed how we can achieve twin objective of reducing cost and pollution and ensuring that the contract made by government will continue to serve the people of India.”

Electric engines are usually used for passenger trains, while diesel is used for freight. Around 25-30 percent of India's locomotives are diesel-engined.

The policy shift could cost New Delhi in compensation - GE is already building a factory for the diesel locos - but executives and investors say it is also an important test for a government that needs foreign investment to create jobs and reboot growth ahead of a 2019 general election.

“The GE case is very important symbolically because they have been among the earliest and most committed investors,” said Amitabh Dubey, a political analyst at research firm Trusted Sources.

“People will be watching to see how this plays out, particularly because the railway contracts were initiatives that the government pushed consciously and worked very hard to get these people in. To then turn around two years later and change your strategy will bother a lot of people,” he said.

1,000 jobs created at Bihar loco plant

GE has already shipped its first diesel locomotive to India and is completing the factory. It has created around 1,000 jobs at the plant and a maintenance shed, and 5,000 jobs in the supplier network.

In a statement, the U.S. firm said the government's change would put future foreign investment at risk.

“An alteration of this contract will have serious impact on job creation and skills development, and cause the government to incur substantial costs,” it said. “This will also undermine government's signature 'Make in India' initiative.”