Over the last few days a lot of analysis has appeared in the digital media which has tried to project that the decision to launch a bullet train between Mumbai and Ahmedabad is a stupid one.
And this is how some of this analysis goes. India will spend Rs 98,000 crore on building thie bullet train between Mumbai and Ahemdabad. This is something it cannot afford. Now compare this to the amount of money that we spend on education, health, roads, etc., during the course of the year.
For the current financial year, 2015-2016, the allocation towards school education and literacy is at Rs 39,038.50 crore. The allocation towards higher education is Rs 15,855.26 crore. When it comes to health, the government has allocated Rs 24,549 crore to be spent during the course of the year. The allocation to the National Highways Authority of India which builds roads connecting the country is Rs 22,920.09 crore. The total allocation to the ministry of road transport and highways is at Rs 42,912.65 crore.
Further, during the course of the year, the Railways plans to spend just Rs 6,581 crore on 970 overbridges and under-bridges and other safety related measures, in order to eliminate 3438 level crossings. And if all this wasn’t enough the total allocation to the ministry of environment, forests & climate change is just Rs 1,446.60 crore.
Given the amounts that we are spending on such very important things how can we be spending Rs 98,000 crore on a bullet train. Can we really afford this?
As a recent analysis on Scroll.in points out: “The Mumbai-Ahmedabad bullet train budget is also 2.3X the entire spend of the Centre on schools. The corresponding figure for health and highways is 3.3 and 2.3, respectively.” [My numbers lead to slightly different ratios, but the broader point the Scroll article is trying to make doesn’t really change, so we will leave it at that].
If we look at the entire issue on the basis of the information that I have provided in the article up until now, spending money on a bullet train, when there isn’t enough money going around for health, education, roads and railway safety, seems out rightly stupid.
Nevertheless, all such analysis that has appeared in the media is essentially simplistic in nature. Allow me to elaborate. As the press release on the bullet train announcement points out: “India and Japan have signed an MoU [memorandum of understanding] on 12th December, 2015 on cooperation and assistance in the Mumbai – Ahmedabad High Speed Rail Project (referred by many as Bullet Train project). Japan has offered an assistance of over Rs 79,000 crore for the project. The loan is for a period of 50 years with a moratorium of 15 years, at an interest rate of 0.1 per cent. The project is a 508 kilometer railway line costing a total of Rs. 97,636 crore, to be implemented in a period of seven years.”
The bullet train between Mumbai and Ahmedabad will cost Rs 97,636 crore and will be built over seven years. Hence, the entire Rs 98,000 crore(approximately) will not be spent in one year. Given this, the comparisons with the health budget, the education budget, the road and highways budget, that have appeared in the media, are incorrect. A spending to be carried out over a period of seven years is being compared with spending carried out every year. A comparison of both over a seven-year period would have been the right way to go about it. But then things don’t look as bad as they do now.
It has been implied that the government is spending this money in one year, which it clearly isn’t. Second, the analysts forget to mention, perhaps unknowingly, that almost 80% of the project is being financed on a very soft loan from Japan.
Japan has offered a loan more than Rs 79,000 crore to be repaid over 50 years at an interest rate of 0.1% per year [Yes you read that right!]. Further, the loan comes with a 15-year moratorium. What this means is that India does not need to start repaying the loan immediately. It will have to do so fifteen years down the line.
Now what would repaying the loan entail? A loan at an interest 0.1% to be repaid over 50 years essentially means almost no interest is being charged. Once India starts repaying the loan, it would have to pay an EMI of Rs 135 crore per month. In fact, the interest is so low that the total repayment over 50 years will amount to just Rs 81,000 crore. This means an interest component of Rs 2000 crore over fifty years. The government of India can clearly afford this.
Also, this repayment doesn’t start for 15 years and has to be repaid over a period of 50 years. Hence, once we take inflation into account, the Rs 135 crore that will have to repaid 15 years down the line and over a period of 50 years, will be worth much less than it currently is. By then, the project will also start generating some revenue.
The question is why is Japan doing this? It “has been agreed that Shinkansen Technology will be adopted for the project.” In effect, the Japanese government is giving a loan to the Indian government at almost 0% interest, in order to be able to buy technology from Japanese companies.
Also, there is another reason for the Japanese largesse. As Bharat Karnad writes in Why India is Not a Great Power (Yet): “With an eye firmly on China as the main adversary and security challenge, India can synergize its engagement and role with the military, political, and economic capabilities of countries feeling threatened by Beijing to keep China at bay.”
Once these factors are taken into account the bullet train project between Mumbai and Ahmedabad will not be a drain on the government finances. Having said that the government will have to ensure that it does not become a “white elephant” as and when it starts. In order to ensure that the ticket prices of the bullet train will have to be lower than that charged by airlines.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
The column appeared on Huffington Post India on December 14, 2015