High Speed Rail: A necessary step forward

A frequent criticism has been whether the funds being used for HSR would not have been better used in improving safety and expanding traditional rail capacity

A decade after Indian Railways first proposed High Speed Rail (HSR) routes, the foundation stone for India’s first HSR link, between Ahmedabad and Mumbai, will be laid on Thursday. In five or six years, when the trains start running (as per the plan), the travel time between the two cities should fall from the current 6-8 hours to just above 2 hours (for the two-stop journey; one that stops at all 12 stations would take about 3 hours). The 508 kilometre project is expected to cost Rs 1.1 lakh crore, by far the most ambitious project ever undertaken by the Railways.

A plethora of problems plague the Railways, including ones related to safety and timeliness, and a potential debt trap (as salaries and pensions account for more than two-thirds of revenues, and structural adjustments to key revenue drivers such as coal, iron ore and food grains erode the revenue base, it is relying on debt to expand capacity). A frequent criticism therefore has been whether the funds being used for HSR would not have been better used in improving safety and expanding traditional rail capacity.

But that is an unnecessary debate, in our view, as HSR does not preclude action elsewhere. In any case, funds available for this project (a subsidised loan from Japan funding more than 85 per cent of the project: A 50-year loan at 0.1 per cent interest with a moratorium for 15 years) would not be available for other purposes. Cheap financing is a routine tactic to win such business as there are only a handful of locations globally where HSR may work, and three consortiums, one each from China, Japan and Europe, are chasing them. You need two populous and relatively rich cities (capable of generating 10-40 million rides per year) separated by 500 to 1,000 kilometres (any less, and the train does not have the space to accelerate or slow down; any more, and airlines start to become more competitive). India has already identified nine HSR routes: Locking this future demand in would clearly be the attraction.

Can the project be economically viable? Access to nearly free capital does bring down the hurdle rate for financial returns, but with Mumbai-Ahmedabad air tickets for next week costing less than Rs 2,000, will there be 15 million passengers a year at the targeted Rs 2,500-3,000 ticket price?

It is important to understand that, in addition to pulling traffic from air, rail and road, HSR also generates it. That is, people start travelling because the option is available. In China, nearly half the traffic has been found to be generated. HSR targets “day return” traffic: It may take the “fast” train an hour to get from Surat to the Bandra Kurla Complex (BKC, the financial hub of Mumbai), and cost Rs 35,000 a month. If a few thousand BKC workers choose to stay in Surat that would be a million trips a year. Will Thane, Virar and Boisar (all planned stops), or even Vapi become attractive options to live for those working in Mumbai city, or Vadodara, for those working in Ahmedabad? Unlike air travel, cities that lie in between also contribute to traffic. Mumbai airport eventually shifting outside the city would also add to HSR’s advantage.

Further, as per the OECD, revenue is only 30 per cent of the “gross benefits” from HSR. Nearly 50 per cent could be rail user time savings (including from improved reliability): These economic benefits may not accrue to the Railways, but help justify the trip. The environmental impact of a fully functional HSR is also meaningful, as CO2 emissions are only a fraction of those from planes or cars. It takes a while though for these gains to offset the CO2 emissions caused by the construction of the line.

HSR started with the Shinkansen in Japan in 1964, spread to Europe in the late 1970s, and saw increased adoption there in the 1990s. The Chinese started two decades ago and now account for nearly two-thirds of all HSR track globally, with more than 20,000 kilometres constructed and another 25,000 in the pipeline. Their initial capital investments in HSR were six times than rail revenues. Now, busier routes such as Shanghai-Beijing have become profitable, and the economic transformation brought about by HSR is well acknowledged, even as questions remain regarding the viability of their more ambitious remote links. For India, it is now important to experiment with this technology. 

In an otherwise investment starved economy, this is an example of routing low-cost surplus capital available globally to build infrastructure in the country. Similar to the Delhi Metro Rail Corporation becoming a consultant to metro rail projects across the country, if successful, this project could play a similar role for HSR. Gaining experience of under-sea tunnels and advanced signalling technology could be added benefits.

Like any project, however, execution is what will eventually matter: Delays add meaningfully to cost, and upend the underlying economic rationale. Given the broader goals of technology transfer and up-skilling, the project will also need to balance mandatory sourcing from Japan (the reason for the cheap funding), with indigenisation of procurement (“Make in India” is a target too).

The writer is India Equity Strategist for Credit Suisse