Is PM Modi’s bullet train project economically viable?
The literature on bullet train suggests that for any bullet train project to succeed, it should get at least 1 crore end-to-end passengers. However, it was estimated by JICA that it would be about 1.46 crore passengers in the first year of operation, as it was estimated that 40,000 end-to-end passengers will be carried by in 2023, the first year of operationopinion Updated: Sep 21, 2017 21:19 IST
There seems to be mixed response to the prestigious Ahmedabad-Mumbai bullet train project. Is this an economically viable project given the cost is over Rs 1 lakh crore? What are the externalities that emerge from such project? The 508-km Mumbai-Ahmedabad High Speed Rail Project will be funded by a loan of Rs 88,000 crore from Japan at an expected interest rate of 0.1%.
There are two clear dimensions of economic viability and financial viability to any mammoth project. This project is no exception. The economic viability is a larger umbrella comprising revenue and expenditure on financial terms and quantify all the externalities that arise from the project such as savings in time and fuel, reduction in accident, savings in vehicle operating costs, reduction in emission and air pollution, spin off in the form of economic development and employment, etc.
If a project is economically viable but financially unviable, it would still bleed the project’s finances. So, the conservative financial viability will be the yardstick for the Ahmedabad – Mumbai bullet train project.
The revised estimates of the total cost of the project by Japan International Cooperation Agency (JICA) is about Rs 1.10 lakh crore, out of which about 80% comes as a loan with an interest rate of 0.1%, a moratorium of 15 years and the repayment period of 50 years.
The remaining 19% is borne by the Union and state governments of Gujarat and Maharashtra. The literature on bullet train suggests that for any bullet train project to succeed, it should get at least 1 crore end-to-end passengers. However, it was estimated by JICA that it would be about 1.46 crore passengers in the first year of operation, as it was estimated that 40,000 end-to-end passengers will be carried by in 2023, the first year of operation. So, the project passed the first test of criteria.
The second and specific criteria is to evaluate the all the financial inflow and outflow of the project and to see whether the total financial inflow exceeds the total financial outflow substantially in the first year of operations.
The farebox revenue (tariff earnings) from 1.46 crore end-to-end passengers in 2023 is estimated to be about Rs 4,857 crore in 2023. The non-fare box revenue, which is one important source of revenue generally considered in these mammoth projects, is not considered here as it is too early to realise it in the first year of operation and hence the total financial inflow would be Rs 4,857 crore in 2023.
The expenditure on the part of the bullet train project in 2023 will be Operations and Maintenance (O&M) expenses, interest payment on the principal and the annuity of principal lent by Japan.
The O&M expenses in 2023 is estimated to be about Rs 1,226 crore. The interest payment for the loan will be about Rs 88 crore and the repayment of principal spread over 50 years of payback period will be about Rs 1,760, both for 2023. Although interest payment and principal repayment meant for 2023 can be paid after the moratorium period, they should be kept aside from the very first year of operations to avoid default of loan repayment. Summing up, the total financial outgo and total financial inflow in 2023 would be Rs 3,074 crore and Rs 4,857 crore, thereby generating a surplus of Rs 1,810 crore. It is the extremely favourable loan terms from Japan made the project financially viable.
Aside from the economics of the project there are several externalities that arise from such project. First, based on past researchers in the domain of service quality it is expected that Bullet Trains will create an ideal expectation in or what is termed as ‘wished for’ level of performance from transportation and logistics organizations. It is expected to create an ideal standard that will form the highest consumer expectations shape complaint or/and complementing behaviour and thereby encouraging citizens of India to demand superior services in walks of life. Thus, bullet trains may seek to encourage not only high-quality services, but also set high expectations among citizens.
Additionally, several researchers have demonstrated that national distinction can be manifested through various symbols of progress. Consequently, bullet trains if designed and constructed well could be a demonstrations of liberty, expertise, prosperity, and development. Finally, past researches have also suggested that such symbols of progress also possess emotive qualities that can motivate the populace to commit to national goals and augment nationalism. Could bullet trains demonstrate our country’s commitment to become an economic superpower, no matter what it takes to do it?
Dheeraj Sharma is director IIM-Rohtak. TS Ramakrishna is a doctorate from IIM-Ahmedabad.
The views are personal