No. 62, January 2016

No. 62
(January 2016):

Railways on Track for Privatization

bulletPart One

bulletPart Two

bulletPart Three


Constructing Theoretical Justifications to Suppress People’s Social Claims

bulletPart One

bulletPart Two

bulletPart Three

Debroy Committee Report

Railways on Track for Privatization

Part III. ‘Fiscal constraint’, fake alibi for inviting foreign capital

The Bibek Debroy Committee on the Railways[1] pleads the Government’s financial stringency as an alibi for turning to private and foreign capital: “With Government funding getting thinner on account of the Government itself being hamstrung for resources, …IR has little option but to look for non-government sources of funds for investment.”

In his 2015-16 Railway Budget speech, the Railways minister projected a seemingly ambitious programme, of investing Rs 8.5 lakh crore over the next five years, with the help of not only multilateral agencies such as the World Bank and Asian Development Bank, but also international financial investors:

…the scale of our investment needs is such that it will require us to seek multiple sources of funding…. For financing remunerative projects through market borrowings, it is intended to tap low cost long-term funds from insurance and pension funds, multilateral and bilateral agencies which can be serviced through incremental revenues. Railways will create new vehicles to crowd in investment from long-term institutional investors and other partners.

Debroy points out that foreign investors such as international insurance companies and pension funds will need to be provided assurance that they are not lending to the Railways as a whole, but to specific, profitable projects which have to be isolated financially from the rest of the Railways: “owing to the historical baggage of a large shelf of projects riddled with time and cost overruns and continued piece meal allocations, IR needs to change its investment strategy through ring-fenced investments in High Yield Projects.”

In order to attract foreign investors, a list of projects has already been drawn up which will quickly yield revenues. The Railway minister said: “In the next five years, our priority will be to significantlyimprove capacity on the existing high-density networks.Improving capacity on existing networks is cheaper. There are no major land acquisition issues and completion time is shorter.” The 2015-16 Railway Budget introduces the term “Extra-Budgetary Resources (Institutional Finance)”, targeting the raising of Rs 17,136 crore from foreign investors for accelerating completion of capacity augmentation projects.


Bogus argument of lack of funds
The entire argument of the Railway minister, the Debroy Committee, and several similar past committee reports[2] revolves around the claim that the Government does not have the funds. This is a bogus argument, which has not become any truer through repetition. As has been widely pointed out, the Government lavishes very large subsidies on the corporate sector and wealthy individuals in the form of tax concessions. In 2014-15 the revenue forgone on direct taxes alone was over Rs 1,00,000 crore (Rs one trillion), or the size of the entire Railway Plan for 2015-16. (The size of excise duty and customs duty concessions, net of export promotion schemes, was another Rs 4,50,000 crore, or Rs 4.5 trillion.) As pointed out in Aspects no. 54, India’s tax revenues, as a percentage of GDP, are far below the average for developing countries, even sub-Saharan countries.[3] In other words, the Government does not have the funds for investment because it does not wish to tax the wealthy.[4]

Another revealing comparison: India’s military expenditure in 2015-16 is budgeted at Rs 3.1 lakh crore (Rs 3.1 trillion); military capital expenditure alone (i.e., purchase of weapons) is nearly Rs 95,000 crore, or about the size of the Railway Plan.[5] So the plea of “lack of funds” is actually a choice of where to spend.

In the last decade, under the same alibi of lack of funds, India has seen a frenzy of PPP activity. According to World Bank data, India led the world in PPP activity between 2006 and 2012. By end December 2012, it had over 900 PPP projects in the infrastructure sector, at different stages of implementation. The 12th Five Year Plan (2012-17) projected that the share of the private sector in infrastructural investment would rise from 36 per cent in the previous Plan to 48 per cent. But India has also witnessed perhaps the most scandals regarding the terms of PPPs, and, more broadly, the entry of private investors in spheres earlier reserved for the public sector. Indeed, private airports, coal mining (power), and natural gas exploration have been the subjects of critical reports by the Comptroller and Auditor General.

As the economy slowed down further and further since 2010, and the revenues from PPP projects appeared less attractive, private investors stopped work on these projects. Latest World Bank data show that private infrastructural investment in India thus fell every year after reaching record levels in 2010, including a 76 per cent drop in 2013 from the average of the previous five years.[6] Evidently, the earlier surge of PPPs was a speculative financial binge fuelled by the easy availability of credit from public sector banks, on Government direction.

A Reserve Bank deputy governor said that the funding for the PPPs had come so largely from the public sector banks, rather than the promoters’ pockets, that “the ‘Public-Private partnership’ has, in effect, remained a ‘Public only’ venture”.[7] So much for the claim that the private sector would provide the funds.

The official Economic Survey 2015-16 provides very revealing data and comments in this regard. It shows that stalled projects, with a total value of 7 per cent of GDP, are overwhelmingly in the private sector (54 such PPPs in the power sector alone). It also shows that the main reasons for the stalling of private sector projects are “unfavourable market conditions” and “lack of promoter interest”. Heavily laden with bank debt, the stalling of these projects has in fact led to a steep rise in public sector banks’ bad loans and ‘re-structured’ debt. In theSurvey’s words, “Perhaps contrary to popular belief, the evidence points towards over-exuberance and a credit bubble as primary reasons (rather than lack of regulatory clearances) for stalled projects in the private sector.”[8] The fact is, since private promoters have put up little of their own cash, they have little incentive to revive these projects as long as demand does not pick up. Infrastructural development has been held hostage to the revival of the economy, presumably with a fresh bubble.

Moreover, private investment does not come cheap. A 2012 study revealed that, in the U.K., using public-private partnerships in the transport sector has entailed a considerably higher cost of finance than if these services had remained in the conventional public sector. In theory, PPPs are meant to transfer business risk from the public sector to the private sector, which is rewarded accordingly. But in practice, the risk is transferred from the private firms to their workforce and to the public as tax payers (in the form of higher State subsidies to the private firms) and as users (in the form of higher rail tariffs). The beneficiaries are the banks who provide the finance and the private firms, both of whom are shielded from public scrutiny.[9] Sizeable sums are also spent on legal fees and payments to financial advisors.

According to a Financial Times investigation of 2011, “The [U.K.] taxpayer is paying well over £20bn in ‘extra’ borrowing costs – the equivalent of more than 40 sizeable new hospitals – for the 700 projects that successive governments have acquired under the private finance initiative [the British term for PPP]…. In addition, lawyers, financial and other consultants have earned a minimum of £2.8bn and more likely well over £4bn in fees over the past decade or so getting the projects up and running.”[10]

Railway investment multiplier and tax revenues
The arguments about the paucity of public finance, and the compulsion to turn to private finance for the Railways, can also be punctured in another way: by estimating the impact of railway investment on tax revenues. Unusually for an official document, the latest Economic Survey argues that, in the current situation, the private sector cannot be expected to drive investment, and so “public investment may need to step in to recreate an environment to crowd-in private sector investment in the short term.” [11] The sector which the Economic Survey promotes for such public investment is the Railways. It uses the concept of the ‘multiplier’, that is, the eventual rise in the GDP as a proportion of the initial rise in spending. (For example, if the Government were to spend an additional Rs 100 on building a road, and those who received this income in turn spent part of it on various goods and services, and those who received that in turn similarly spent part of it, the eventual amount of expenditure would be larger than the initial Rs 100. If the eventual figure, inclusive of the first Rs 100, is Rs 200, the fiscal multiplier is 2.)

According to the Survey’s calculations, the strong backward linkages (demand pull from other sectors) of the Railways with manufacturing and services means that increasing railway output by Re. 1 would increase output in the economy by Rs 3.3. It notes that “This large multiplier has been increasing over time, and the effect is greatest on the manufacturing sector. Investing in Railways could thus be good for ‘Make in India.’” The Survey in addition argues that, since there are sectors where railway services are an input to production (forward linkages), “A Re. 1 push in railways will increase the output of other sectors by about Rs. 2.5…. Combining forward and backward linkage effects suggests a very large multiplier (over 5) of investments in Railways.” (emphasis added)

If this is so, let us assume the Government provides the Railways Rs 1,00,000 crore (Rs one trillion, or the size of this year’s Railway Plan) as Gross Budgetary Support, for investment in the Railways. Let us say the Government borrows this entire sum; the current rate of interest on long-term Government borrowings is less than 8 per cent. Given a multiplier of 5 for Railways investment, this would result in the GDP eventually (over, say, five years) rising by Rs 5,00,000 crore. If we take the Central Government’s net tax revenues to be 9 per cent of GDP (as projected for 2015-16), annual tax revenues would rise over this period by Rs 45,000 crore. In other words, even ignoring any additional revenues to the Railways that would result from these investments, the additional tax revenue to the Centre would more than pay for the costs of borrowing.

This underlines once more that, given the role of the Railways, it harms the economy if they are viewed them in a narrow commercial frame, as a mere source of profits (which have then to be at least as attractive as the profits in other investment opportunities for private capital). However, it is clear that the rulers are determined to present them in precisely such a narrow frame, so as to obscure the alternatives and ram through their agenda. It should be opposed, not only by rail workers, but by the general public.




[1] The official name is “Report of the Committeefor Mobilization of Resources for Major Railway Projectsand Restructuring of Railway Ministry and Railway Board.”

[2] For example, the NTDPC, cited in footnote 3.

[3] “The Fiscal Deficit Bogeyman and His Uses”, Aspects no. 54. The average “General Government Revenues” for advanced economies during 2007-11 was 36.7 per cent of GDP; for emerging market and developing countries, 27.9 per cent; for sub-Saharan Africa, 27 per cent; and for India, 18.5 per cent.

[4] Nor should one forget the Railways’ own subsidization of the private corporate sector by illegally under-pricing carriage of iron ore destined for export, a scam that cost the organization over Rs 29,000 crore, according to the Comptroller and Auditor General. Such a scam would have been inconceivable without a go-ahead from the top.

[5] See Aspects no. 61, pp. 5,7.


[7] K. C. Chakrabarty, “Infrastructure Financing by Banks in India: Myths and Realities”, RBI Bulletin, September 2013.

[8] Chapter 4, vol. I. Despite this, the Economic Survey dogmatically asserts: “The private sector remains key to rapid delivery of high quality infrastructure. Restructured PPP frameworks will revive their interest in infrastructure and bring in funding from pension and insurance funds.” (p. 76)

[9] Jean Shaoul, Anne Stafford, Pam Stapleton, “The Fantasy World of Private Finance for Transport via Public-Private Partnerships”, paper prepared for a Roundtable of the International Transport Forum, September 2012.

[10] Nicholas Timmins and Chris Giles,“Private finance costs taxpayer £20bn”,Financial Times, August 7, 2011.

[11] Economic Survey 2015-16, vol I., p. 67.





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