Syllabus Connect:- GS III ( Infrastructure: Energy, Ports, Roads, Airports, Railways, etc.)
On July 1, 2020, the Indian Railways launched the formal process of inviting private parties to run trains on the Indian railway system. Bids were finally opened last month. Hopes of a large participation were belied as there were no bids for nine clusters and only two bids for three clusters. Even for these three clusters, the only serious bid was by Indian Railways’ (IR) own company IRCTC, which in effect negated the basic objectives of bringing in private capital.
What are the reasons for this failure?
- It is an outcome of the lack of alignment of the interests of IR and the concessioners. IR wants the capital and technology without giving up control, while the concessioner wants a far more equal relationship to be moderated by a regulator.
- IR has imposed constraints that prevent efficient decisions and adopted an organisational design that does not take into account the characteristics and associated risks that will determine outcomes and investment decisions.
What are these risks and constraints?
- Train sets have to be purchased without really knowing how much traffic the service will be able to attract in the face of rising competition from airlines.
- IR does not guarantee the investor that, in case the concession fails, it will acquire the train sets.
- The other big dampener is the absence of a regulator for resolving disputes.
- The proposed independent engineer is far from satisfactory.
But suffice to say that the current model of inviting private players to run trains has failed. To take forward the initiative, a new model based on a new strategy is required.
The central issue is how to align the interests:
India’s need to be capable of designing and manufacturing state-of-the-art rolling stock, IR’s need for private capital participation and private capital’s necessity of earning a profit.
They can be aligned provided the lumpiness of investment in train sets can be eliminated by establishing a company that leases rolling stock not only to concessioners but also to IR. This will also enable reducing the concession period from 35 years to a more reasonable 10-15 years, bringing in competition.
The rolling stock company, apart from leasing train sets, can also be the window for bringing in new technology, preferably by purchasing from those who manufacture in India in collaboration with one of IR’s production units and are willing to transfer the technology.
This will require IR to guarantee a minimum offtake, say for a period of 10 years, to the manufacturer. For starters, IRFC, which is already into leasing rolling stock, can be that company.
A word about bringing in new technology. It is essential that the opportunity opened up by inviting private players is used to move the rolling stock industry up the industrial value chain and bring about a structural change of the Indian economy.
This can only be brought about by a vision that encourages long-term arrangements with rolling stock suppliers. An arrangement that gives access to IR’s rolling stock market is the only way to compel global players to share technology and form joint ventures with Indian companies.
However, technology transfer is not simply a matter of manufacturing in India. It requires understanding the critical elements of the technology and absorbing them into the design-production process.
This calls for the investment of large sums of money and the involvement of universities, research institutes and national laboratories. For example, for developing high-speed train technology, the Chinese involved 25 national first-class key universities, 11 first-class research institutes, and 51 national-level laboratories for research, development and production. India will also need to do something similar.
As far as drawing private players is concerned, all that is required is to reduce the risks for the concessioners, reduce the period of the concession to around 15 years, establish a regulator and moderate charges like the amount for the maintenance of tracks and stations.
With these changes, the plan may still take off. However, the initiative will remain limited to just running trains if there is no long-term vision.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.