Foreign Direct Investment (FDI), as distinguished from portfolio investment, has been defined as “establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor”. The government of India has put in place a policy framework on FDI, which is transparent, predictable and easily comprehensible. This framework is embodied in their circular on Consolidated FDI Policy, which updates and consolidates the regulatory changes that are introduced from time to time.
It is the intent and objective of the government of India to attract and promote FDI in order to supplement domestic capital, technology and skills, for accelerated economic growth. The depressed global climate, coupled with the moderated business sentiment within the domestic market in the past few years has affected FDI inflows to key infrastructure in the country. The total FDI inflows into major infrastructure sectors, cutting across all sectors, during April-November 2012 (the latest data available) registered a decline of as much as 98 per cent. Regulatory uncertainties, slower growth, and delays in acquisition of land were some of the factors that have contributed to this decline.
FDI flows depend on a whole range of factors such as political and macroeconomic conditions, infrastructure and human capital, domestic policies and the bureaucratic environment. Domestic reforms are crucial in contributing to attract FDI, and their effectiveness can be enhanced if the regulatory framework remains stable, transparent and non-discriminatory. Although India has a well-developed legal system, the current legal and regulatory environment sometimes acts as an obstacle to the flow of foreign private capital.
Lack of coordinated planning could also lead to unwanted delays in approved projects, since projects belonging to different sectors are often inter-dependent and unless all get completed within the fixed time schedules, the overall infrastructure development in the targeted geographical area suffers. An example could be the development of an international airport that demands simultaneous completion of road and rail connectivity where the new airport is located far from the city.
India has the world’s fifth largest rail network, after the US, Russia, Canada and China. However, it is lagging behind the others and has deteriorated over the years due to heavy congestion of the tracks and the failure to modernise. While the railways had a market share of 65 per cent in the goods movement of the country in 1986-87, this has now come down to 30 per cent while that of the road sector has gone up from 34 per cent to 60 per cent during the period. A mere 30 per cent of the investment in the railway budget is currently financed through its internal revenues. The rest comes from government handouts and loans. The vast network of railways is, therefore, in desperate need of more funds.
The department of industrial policy and promotion (DIPP) has been pushing for allowing FDI in railways since August last year. Currently, FDI is not allowed in railway transport other than mass rapid transport systems. The DIPP had recently sent a cabinet note for approval for allowing 100% FDI in railway transport such as elevated rail corridor projects, freight terminals, suburban corridors, dedicated freight lines and high-speed train systems falling within the fixed-line category to meet the urgent need to modernise and expand the railway network, which require large capital investments. Areas related to train operations and safety are, however, excluded. It suggests that companies should be allowed to pick up 100 per cent stake in the special purpose vehicle (SPV) that will construct and maintain rail lines connecting ports, mines and industrial hubs with the railways network. The idea is to provide “first-to-last-mile” connectivity to ensure smooth movement of goods from the source (like mines) to ports.
The proposal is expected to take forward the public-private-partnership (PPP) mode of investment which has failed to take off. The SPV is also expected to go in for joint ventures with Indian companies that manufacture rolling stock and track equipment. Companies such as Canada’s Bombardier, General Electric of the US and Germany’s Siemens have already shown interest in investing in India. Chinese companies such as CSR Corp Ltd and Japanese manufacturers that already supply hi-tech equipment to the railways are other potential investors.
The home ministry has, however, flagged its concerns on Chinese firms that may be investing in projects near the international border with China. It is of the view that FDI in railway projects with involvement of the Chinese workers near the restricted areas and in vicinity of international border was not desirable from the security angle. The DIPP has now proposed setting up of a core group with requisite technical and security expertise under the railway ministry to evaluate FDI proposals in the sector to address national security concerns. The core group would examine proposals on a case-to-case basis to ensure security concerns are not breached.
It is estimated that the move to inject FDI in railways could attract up to $10 billion of foreign investment over the next five years. Train travel is still cheap, and some 24 million passengers use this mode of transport daily. But years of underinvestment are a pointer to the inefficiencies that have lately been surfacing in the functioning of the railways. Its safety record too has been largely dismal. Railways must plug these deficiencies and introduce structural reforms in its administrative set-up while waiting for the cabinet to endorse the proposal. This will boost the confidence of foreign investors and encourage them to finance railway’s infrastructure projects.
With a change in government in the offing, the cabinet approval is not likely to come any earlier, but it is to be hoped that whatever the new political dispensation be, the proposal is not relegated to the backburner, but instead gets carried forward so that railways are able to secure additional finances for completing urgent development works. With FDI, this old and trusted public sector undertaking may just manage to remain afloat.
The author is a former MD of Railway Finance Corporation.
E-mail: mathur.surendra@gmail.com