Private rail for India: a positive step towards long-overdue reform?

Adele Berti 6 October 2020 (Last Updated September 28th, 2020 12:25)

Private operators are being invited to run services across India’s rail network for the first time. However, the move is causing division between those supporting a reform of the network and those who fear the ramifications of privatisation.

Private rail for India: a positive step towards long-overdue reform?
Future operators will begin their contracts in March 2024 with a concession period of 35 years. Credit: Navaneeth Kishor (via Flickr).

Indian Railways is opening up to private operators for the first time since it was nationalised in 1951. Starting from March 2024, private companies will be allowed to run passenger services on one of the world’s largest networks, which handles some 8.4 billion people every year. 

The plan was announced earlier this summer by the current owner and operator, the Indian Ministry of Railways. Initially slated to start in March and then postponed due to the Covid-19 pandemic, the scheme is expected to play a key role in the government’s ‘Make in India’ initiative and its goal to attract investment in the country. 

However, political and industry commentators are currently debating the potential ramifications of inviting private companies to India, with some calling for a reform of the network and others warning this could be the first step towards the complete privatisation of the railways. 

Inside Indian Railways’ plan

Despite the delays caused by Covid-19, summer 2020 marked the beginning of a new era for Indian Railways, which expects to attract investment of at least Rs 30,000 crores from private entities. 

To do this, the operator has made available 151 new trains that will run between 109 origin-destination pairs of routes. These have been grouped into 12 clusters to cover the majority of the network.

“Indian Railways suffers from chronic underinvestment.”

Originally planned to start in April 2023, future operators will instead begin their contracts in March 2024 with a concession period of 35 years. The delay was due to an upcoming major infrastructure upgrade that will bring the network up to speed with the latest technological advancements. 

At the time of writing, over 20 potential bidders have already shown interest, with Bombardier, Alstom, Siemens, NIIF, GMR and ISquared Capital all currently in the race to run some or all the clusters.

The move is expected to earn Indian Railways a fee for electricity and lending its infrastructure, as well as a share of total future revenues. In return, the state-run operator is pledging to provide “non-discriminatory access” to private trains, and therefore avoid unfairly favouring its own trains.

According to Mihir Swarup Sharma, a senior fellow at Delhi-based Observer Research Foundation, the initiative has been a long time coming. “Indian Railways suffers from chronic underinvestment,” he comments.

“Tracks and trains are overloaded and government efforts to remedy this – by planning to put in Rs 50trn over the next decade or so – have run into a major tax revenue shortage following the introduction of a new indirect tax regime a couple of years ago [and that] explains the timing.”

The government’s own 2019 Union Budget even mentions that only a part of that Rs 50trn can come from state funds, so private investment is essential to carry out the promised reform. As Sharma puts it, “unless the railways tap into private financing somehow, investment won’t happen.”

There is also a logistical reason. December 2021 is expected to mark the launch of the Dedicated Freight Corridors, a set of cargo-only tracks that will free up capacity alongside the passenger network for the first time in 15 years. The new corridors, which are expected to host almost 70% of freight trains currently running in India, will leave space for the 151 new trains.

Private operators: who stands to benefit?

Passengers are expected to be the main beneficiaries of the project. “The Indian rail service has been behind its potential for decades, especially when it comes to the passenger services,” says KE Seetha Ram, senior consulting specialist for capacity building and training projects at the Asian Development Bank Institute (ADBI). “There’s a lot of potential but Indian Railways haven’t been able to meet demand, to the extent that it’s a lost opportunity.” 

Attracting private investment is hoped to make up for these missed chances, driving competition, more and different services and attracting more users to the network. “Indian Rail is already trying some small changes [across] cabin services, food, catering, digital booking [and so on],” he continues. “These are huge improvements in terms of passenger satisfaction rates, but [what they need now is] improvement in terms of punctuality, comfort, rolling stock and so on.”

“Indian Railways haven’t been able to meet demand, to the extent that it’s a lost opportunity.”

As Sharma explains, private entities are expected to improve services even further, even “allowing rail to compete with air travel for the first time in recent decades”.

Beyond boosting passenger ratings, Seetha Ram says that private investment will catalyse economic growth. “It’s kind of a virtuous cycle whereby if you have good transport infrastructure, you get better supply chains, better business activity [and] better income growth,” he says. 

He adds that Indian Railways could have the chance to learn from the example set by India’s telecom sector. “The telecom industry has almost no financial support from the government; it’s completely delivered by the private sector and regulated by the government, bringing excellent services for the customer, value for money [and driving] global competition,” he explains.

“This will be an opportunity for Indian Railways to welcome the private sector and bring some value-added and differentiated services. Hopefully, that will also pave the way for some kind of a larger institutional reform to step back on the backdrop.” 

The case against private rail services

Not everyone is in favour of inviting private operators. “The railway is a public service and not a profit-generating enterprise,” the Politburo of the Communist Party of India (Marxist) said earlier this year. “Such privatisation undermines the basics of a self-reliant economy.” 

“Previous attempts to open up to private companies have set a precedent that shouldn’t be ignored.”

Several local trade unions have echoed this sentiment, with the president of the National Federation of Indian Railwaymen Guman Singh saying earlier this summer: “While going in for privatisation, the government will destroy the railways and make travelling costlier. We outrightly condemn the government’s move.”

Mihir Swarup Sharma too believes that the benefits for private operators remain unclear, as they will “essentially be competing with the [Indian Railways’] own products while being subject to [Indian Railways] infrastructure and decision-making”. 

He also warns that previous attempts to open up to private companies have set a precedent that shouldn’t be ignored. “Private airlines in India in the 1990s […] significantly improved the passenger experience,” he explains. “But dealing with state-run competition (Indian Airlines and Air India) within the state-run infrastructure network (the Airports Authority of India) was impossible, and none of them have survived to 2020.”

Is complete privatisation on the cards?

For the time being, it does not seem that Indian Railways is on track for complete privatisation.  

The Narendra Modi government is indeed considering the option of privatising (or strategically disinvesting from) several sectors, including airports, banking, insurance, petroleum and defence equipment. The railways are so far excluded from this group, though unions fear the current initiative could be the starting point for a future de-nationalisation of the sector. 

“Indian Railways needs complete reorganisation and a more autonomous and private sector outlook.”

According to both Sharma and Seetha Ram, reforming the industry – rather than privatising – is much more urgent. “Indian Railways needs complete reorganisation and a more autonomous and private sector outlook,” says Sharma. “The Ministry of Railways in New Delhi should be shut down but total privatisation may not make sense.” 

He adds that a Deutsche Bahn-inspired model – whereby the German Government is the single shareholder of the private joint-stock company Deutsche Bahn AG – would be a suitable alternative. 

Seetha Ram agrees that such a model would be a better fit for the network. “India likes [creating] special purpose vehicles that are kind of autonomous in a way, or where the government is a big shareholder and acts like a mini company,” he concludes. “These allow it to offload [and create some] autonomous entities which can gradually [move into] operating like the private sector. That’s the direction [for the government] to go in.”