This is an article published by Economic Times, the unashamed admirer and cheerleader for Modi’s corporate worship economic model.
International loans by Japan and other developed countries like US, Germany, France, England etc come with several riders attached. Finance capital skins a cat multiple times – interest on loan, profits on projects, conditions on commercial treaties, political influence, so on and so forth.
For the bullet train project, 30% of contract value must go to Japanese firms. Guess what? They will earn monopoly profits on these orders.
In addition to the sourcing condition, they may have imposed formal and informal conditions on many fronts such as trade treaties, political alignments etc. Indian government should dance to Japanese tunes in return for the ‘generous’ 0.1% interest Japanese loans.
Giving loans at 0.1% is also a win for them
“while an interest rate of 0.1% may appear free from an Indian perspective, it is not so in Japan. Japanese short term interest rates (Tokyo Inter Bank Offer Rate) is 0.06%. The interest rate offered by ten-year Japanese government bonds is 0.04%. India’s ten-year government bond offers 6.5%. The gap between Japan’s 0.04% and India’s 6.5% is explained by the inflation expectations in the two countries.”
“If India’s inflation rate is average 3% over the next two decades and Japan’s inflation rate is zero, as is widely anticipated, then it stands to reason that the rupee must depreciate 3% every year because the rupee’s value is eroding by 3% as against no erosion in the yen. So, the rupee is bound to weaken by over 60% in two decades. This means that on a loan of Rs 88,000 crore, the repayment, in rupee terms, goes up to more than Rs 1,50,000 crore at the end of 20 years.” (Do the maths: India’s first bullet train isn’t ‘free of cost’ as Modi claims)
Hence, a loan of Rs 88,000 crore at 0.1% interest is a big profit for the JICA.
Another project funded by JICA is Chennai Metro Rail project, the fare for which is set too high, hardly anyone uses the train. But JICA will start collecting its money as and when it falls due, who will pay for it? Indian tax (GST) paying public.
Bullet trains are not a hit everywhere. While a debate is raging over viability of India’s bullet train project which was inaugurated by Prime Minister Narendra Modi and Japanese Prime Minister Shinzo Abe last week, it would be worthwhile to know how bullet train fared in Taiwan. It flopped, actually.
A consortium of private Taiwanese companies started the project in early nineties. In 2007, it ran the bullet train which was based on the Japanese Shinkansen technology, the same that India will use. The project cost $14.3 billion. Seven years later, in 2014, the government hinted that the rail operator could go bankrupt. Cumulative losses stood at 46.6 billion New Taiwan dollars or roughly $1.5 billion. Since it was an important piece of public infrastructure which had to be rescued, the Taiwanese government bailed it out next year by injecting nearly $1 billion of public money which reduced the operator’s share by 60 per cent.
The private companies were building the bullet train under the ‘build, operate and transfer’ model. They had to hand it over to the government in 2033. But the government bailout put off the transition to 2068.
What went wrong?
Depreciation and interest payments weighed heavily on the company, making it difficult to erase losses that built up over time, according to a report in Nikkei Asian Review. The cost and ridership estimates too had gone awry. The forecast was of 240,000 passengers a day in 2008. In 2015, daily traffic was less than 140,000 passengers, barely half the initial estimate. Taiwan’s low economic growth, which was probably not reckoned earlier, also impacted the project.
The company had to cut fares in exchange for the bailout, which was not seen to be helping its balance sheets. About a year later, it opened three new stations. This move too was criticised for weighing down on its financial condition.
What worked against Taiwanese bullet train
After seven years of operation, the ridership was almost half of what was initially estimated.
2) Interest and depreciation costs
High interest and depreciation costs put a pressure on the finances of the project.
3) Cost overrun
Taiwanese bullet train came at an expensive price tag of $14.3 billion. The train passes through rugged, hilly terrain where construction becomes costlier. Most of it had to be built on an elevated track.
4) Low economic growth
Just after the bullet train was launched in 2007, Taiwan faced one of its worst phases of economic growth. Such a big public infrastructure project could not remain unaffected by the overall economic slump.
India’s bullet train project, which is funded nearly 80% by Japan at a 0.1% interest with a moratorium of 15 years, cannot be compared to the Taiwanese project. Unlike the Taiwanese project, ridership will not be a challenge for bullet train as the Ahmedabad-Mumbai stretch is dotted with dense industrial and commercial area. Interest payment too should not be a big problem as the Japanese loan will start after 15 years and the rate too is quite low.
However, cost overruns could be a problem for India’s bullet train too because such a large construction project spread over a long period can face various challenges. Cost overrun can also lead to higher ticket prices which would impact ridership.
As it happened in Taiwan, India’s overall economic climate will certainly impact the bullet train. A resurgent economy will support the project but sliding economic growth will hit its viability.
Courtesy : Economic Times