India: Indian Railways: Opening The Lock Gates Of Opportunities

Last Updated: 6 November 2015
Article by Anirban Roy Choudhury

Key initiatives taken by the Government of India in the railway sector throwing up opportunities for the private sector entities and foreign investors


The Indian Railways serves as the backbone of India's transportation requirements and is critical in augmenting the India growth story. In a move to improve the present situation of the Indian Railways in terms of its ability to cater to passenger requirements and freight operations, the Government has taken up various initiatives by way of making various policy changes and notifying new regulations, which not only contemplate to evolve and improve the railway operations but also opens up various opportunities for the private sector and the foreign investors in the predominantly government controlled Indian Railways.

Some of the key initiatives taken by the Government of India in this regard are discussed below:

(1) Allowing Foreign Direct Investment in the Railways sector

Until recently, foreign participation in the activities of the state owned and operated railways sector in India was prohibited.

However, the situation has now changed and the Department of Industrial Policy and Promotion, Government of India, in order to generate the required funding for the cash strapped railways, has permitted 100% foreign direct investment (FDI) under the automatic route in certain railway activities.

The Department of Industrial Policy and Promotion, Government of India vide Press Note 8 of 2014 dated August 22, 2014 has permitted FDI in the construction, operation and maintenance of:

(a) Suburban railway corridor projects through the public private partnership (PPP) mode;

(b) High speed train projects;

(c) Dedicated freight corridors;

(d) Rolling stock including train sets;

(e) Locomotives or coach manufacturing and maintenance facilities;

(f) Railway electrification and signaling systems;

(g) Freight terminals and passenger terminals;

(h) Infrastructure in industrial parks pertaining to railway lines or sidings including electrified railway lines and connectivity to main railway lines; and

(i) Mass rapid transport systems.

Permitting FDI in the railway sector was a much needed step for providing the necessary boost required for the development and modernization of the capital intensive sector.

The Ministry of Railways has already started to explore potential projects and proposes to award railway projects worth more than US$ 1,000 Billion through the PPP route with FDI opening up immense opportunities for the foreign investors to participate in the railway sector in India.

(2) Making way for development of selected railway stations on the 'Swiss Challenge Mode'

Although the Ministry of Railways has been spending approximately US$ 1 Billion each year on redevelopment and modernization of the railway stations through the Government owned Indian Stations Development Corporation Limited, it has not garnered much success as the facilities and amenities provided by the Indian Railways within and around the railway stations do not match up to the international standards.

In order to boost the activities of redevelopment and modernization of the railway stations, the Union Cabinet has approved the redevelopment and modernization of, in the first phase, 400 A-1 and A category railway stations in India under the Swiss challenge mode.

The railway stations are proposed to be redeveloped and modernized on a 'as is where is' basis, through the Swiss challenge mode.

Commercial development of real estate has also been contemplated as a part of the process. This will not only help modernize the railway stations in India which has been in dire need of modernization for a long time but will also open up major opportunities for both the private sector and foreign investors who can now participate and cash in on this opportunity to redevelop and modernize the railways stations.

(3) Capacity augmentation and network expansion

One of the key reasons for rail journeys taking long and uncertainty of ticket availability on Indian Railways is that the existing railway network of over 115,000 km of tracks is not sufficient enough to cater to the requirements of the Indian population.

In order to address this situation, the Ministry of Railways regularly commissions expansion of the rail network. In the current fiscal, 7,000 km of double, third and fourth tracks has been sanctioned and works for 1,200 km has already been commissioned at an investment of Rs. 8686 crore and it further proposes to commission 800 km of gauge conversion in its network.

In addition, 77 other projects have also been sanctioned covering 9,400 km of doubling, tripling and quadrupling works along with electrification, covering almost all Indian states, at an estimated cost of about Rs. 96,182 crore.

In relation to the aforesaid, and to better handle the rail traffic in the network, traffic facility projects have been made one of the top priorities for the Ministry of Railways with outlay of Rs. 2,374 crore.

These expansion plans proposed by the Ministry of Railways, in addition to augmenting the handling capacity of the Indian Railways, opens up opportunities which the private sector and the foreign investors can optimally cash in on as these network expansions projects will be taken up under the PPP route and FDI has already been permitted up to 100% under the automatic route for railway electrification and signaling systems.

(4) Faster trains, shorter journeys

India being a geographically vast country, and there being no high speed train system in place, journeys from one corner of India to another are long and tiring.

In order to improve the situation and to attract more passengers, it was proposed in the Railway Budget, 2015 that 9 existing railway corridors will be made high speed rail corridors and the speed of the trains on these corridors shall be increased from the existing speeds of 110 kmph and 130 kmph to 160 kmph and 200 kmph respectively. This speed augmentation will cut down travel time and rail journeys on the important inter - metro sections like Delhi – Kolkata and Delhi – Mumbai can be thereafter completed overnight.

Simultaneously, the average speed of freight/ cargo trains has also been proposed to be enhanced under the Railway Budget, 2015. The average speeds of freight/ cargo trains, in empty and loaded conditions, has been proposed to be enhanced to 100 kmph and 75 kmph respectively.

In order to cut travel time, a high speed bullet train has been proposed in the Mumbai – Ahmedabad section and the feasibility study for this project is already under way.

Feasibility studies have also been commissioned for making high speed rail corridors on the diamond quadrilateral connecting the four Indian metro cities viz., Mumbai, Delhi, Kolkata and Chennai.

In order to develop and implement the high speed rail corridor projects, the High Speed Rail Corporation of India Limited has been incorporated as a special purpose vehicle of Rail Vikas Nigam Limited.

Under the extant FDI policy, 100% FDI has been permitted under the automatic route for high speed train projects, dedicated freight corridors and railway electrification and signaling systems amongst others.

This, therefore, opens up immense opportunities for the foreign investors to cash in on the modernization and transformation of the pivotal rail routes in India to high speed rail corridors.

(5) Augmenting freight/ cargo handling capacity

The passenger operations of the Indian Railway is highly cross subsidized with its freight/ cargo operations, and therefore the freight/cargo operations is of significant importance to the sustainability and growth of the Indian Railways. In order to further monetize on the freight/cargo operations, it has been proposed to augment the freight/ cargo handling capacity and operations.

For the said purpose, the Transport Logistics Corporation of India has been proposed to be set up as a nodal agency for developing common user facilities with handling and value-added services to provide end-to-end logistics solution at select railway terminals under the PPP mode.

Therefore, together with augmenting the freight/ cargo operations of the Indian Railways, this opens up potential opportunities for the private sector and the foreign investors (as FDI and private participation is now permitted for dedicated freight corridors and freight terminals).

(6) Mass Rapid Transit Systems: Suburban Rail Networks and Metro Railways

Suburban rail networks constitute a principle mode of transportation in cities like Mumbai, where a large part of the urban population depends on the suburban rail network.

In Mumbai particularly, more than 7.5 Million passengers use the suburban rail network daily making it the largest mass rapid transit system in the world, in terms of ridership.

However, is the existing suburban rail network which is in place in Mumbai equipped to handle this mega rush? No. The Ministry of Railways and the Mumbai Railway Vikas Corporation Limited (the nodal agency for the Mumbai suburban rail network) has been trying to expand the network and augment the handling capacity.

However, due to various issues, little development has seen the light of the day.

Now under the extant FDI policy, 100% FDI has been allowed for development of suburban railway corridor projects through the public private partnership (PPP) mode and for mass rapid transport systems.

Various schemes are being formulated by the Mumbai Railway Vikas Corporation Limited to incentivize the private sector entities and foreign investors to participate in these projects, which will not only help in modernizing and expanding the suburban rail network but will also give the necessary impetus to the private sector and foreign investors to participate and cash in on the opportunities opened up.

Metro railway on the other hand is a much newer mode of transportation in India. The first metro rail network was implemented in Kolkata and started operations in 1984.

This was followed by the Delhi Metro and the Bangalore Metro. However, the growing rise of urban population and the congestion of surface traffic on city roads in the recent times have made metro networks significantly important.

The need of the hour is not only expanding existing metro networks but also to develop green field metro projects in more cities including tier-II and tier-III cities.

The Government of India has already taken cognizance of this and has started the process of expanding the existing metro rail networks in cities like Mumbai and Calcutta. Green field metro projects are also being developed in cities like Chennai, Kochi, Hyderabad, Jaipur, Ahmedabad and Lucknow.

The expansion of the existing metro networks and the development of the green field metro networks in India can be said to be one of the most important opportunities for the private sector and foreign investors and given the thrust, the Government of India is putting in on developing the metro rail networks in India, the opportunities will only increase with time.

(7) Manufacturing facilities for rolling stock and locomotives/ coaches

One more key reason for the demand (passenger rush) – supply (available trains) mismatch in Indian Railways can be attributed to the shortage in the number of locomotives and coaches available on the Indian Railway network.

In India, until recently, the Ministry of Railways through its various departments had been indigenously manufacturing almost every component, including the electric multiple units, diesel train sets and self-propelled coaches, used in the railway sector, with imports forming only a negligible proportion of procurements.

However, the opening the lock gates of FDI for the railway sector may become a game changer in this regard, as the extant FDI policy, which permits up to 100% FDI under the automatic route for manufacturing of rolling stock including train sets, locomotives and coaches and its maintenance facilities, coupled with the various schemes being formulated by the Government of India now will let private sector entities and foreign investors set up manufacturing units for manufacturing the rolling stock including train sets, locomotives and coaches.

Until recently, such manufacturing activities were restricted only to the public sector units and mainly the Integrated Coach Factory, Chennai; Chittaranjan Locomotive Works, Chittaranjan; Diesel Locomotive Works, Varanasi; Diesel Loco Modernization Works, Patiala; Rail Coach Factory, Kapurthala and Rail Wheel Factory, Bangalore.

However, this has now changed and now the Ministry of Railways is more and more outsourcing the manufacturing works to private entities.

The Railway Board, Ministry of Railways had proposed to set up of two locomotive manufacturing units, viz. an electric locomotive manufacturing unit at Madhepura, Bihar and a diesel locomotive manufacturing unit in Marhaora, Bihar on PPP mode opening up the closed cauldron of private participation in railway manufacturing in India and attracting private investment of about Rs 42,000 Crore.

(8) Make in India

In addition to the various opportunities opened up in the railway sector in India as discussed above, the Government of India has made railways as one of the sectors covered under the 'Make in India' scheme.

This scheme aimed at wooing the foreign investors to come and invest in India and make in India proposes to provide further incentives in form of state incentives, export incentives, area-based incentives, tax incentives and research and development incentives.

The scheme paves the way for opening up of further opportunities in the railway sector as more and more projects will be now undertaken under the PPP mode.

This will not only help to implement the much needed development of the railway sector in India but will also incentivise the foreign investors to come and invest in railway projects in India.

Above mentioned are only some of the key steps taken by the Government of India which have opened up opportunities for the private sector entities and the foreign investors in the railway sector in India.

The Government of India has taken several other steps and has formulated various other schemes for the railway sector to give the necessary boost for the private sector entities and foreign investors to come forward and participate in the railway sector in India which has until recently been pre-dominantly Government owned and controlled.

The Government of India has already taken the much anticipated step of opening up of the railway sector in India for private participation and foreign investments and has been notifying various schemes to give the necessary boost to the sector which, though serves as the backbone of the transportation needs in India, is always in need for capital and investments.

The railway sector which was until recently almost entirely closed for any private participation is now, pursuant to the recent steps taken by the Government of India, welcoming more and more private participation and foreign investments. These steps on the Government's part are exponentially creating opportunities for the private sector entities and foreign investors in the railway sector.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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