India’s government said on Thursday it will pour some £89bn into the country’s railway network as part of a major modernisation intended to unlock economic growth.
The announcement was made two days ahead of the presentation of India’s federal budget, which is expected to allocate more funds for infrastructure enhancements, in line with plans of India’s Prime Minister Narendra Modi.
Unlike previous years, the funding should go towards upgrading decrepit existing lines instead of launching new projects, which have frequently been left uncompleted.
"Over the next five years, the railways have to undergo a transformation," said Railway Minister Suresh Prabhu during the budget presentation, without elaborating on details.
The new railway budget means India will increase investment into the network by about a half to 1 trillion rupees (£5bn-10bn) including funds raised by market borrowing.
India’s railway network, the fourth largest in the world, employs about 1.3 million people, making it the country’s largest single employer and the seventh biggest in the world.
Controlled by state-owned Indian Railways, the network, covering 65,436km of routes and 7,172 stations, is mostly reliant on critically outdated equipment in need of immediate replacement and suffers from frequent accidents, failures and poor hygienic conditions.
Many of the network’s lines are operating at full capacity with maximum speeds of the country’s best trains reaching a rather unimpressive 70km/h.
However, none of the previous governments pushed forward with a needed reorganisation of the company, instead announcing new projects for politically sensitive regions with every new budget but rarely completing them.
Economists therefore welcomed the Thursday decision to break with the populist budget tradition but said they would like to see more explanation of how the investment will be funded.
"I am a little doubtful about the ways the railway minister will finance the huge capital expenditure, as the budget lacks the specific detail,” said Jyotinder Kaur, principal economist at HDFC Bank, New Delhi.
The rail budget - a relic of Indian's British colonial past - said the share of rail revenue available for investments would rise to 11.5 per cent in the fiscal year starting on 1 April, up from 8.2 per cent in the current fiscal year.
Excluding market borrowing, the amount projected for investment in 2015/16 is up by 31 per cent, signalling an increased commitment to infrastructure from federal funds.
State-run Indian Railways has more funds available thanks to a sharp drop in the price of diesel fuel that powers most Indian locomotives.
The finance ministry increased federal funding for the railway to 400 billion rupees from 301 billion rupees budgeted in 2014/15.
Passenger fares are subsidised by freight revenues that are high compared to other countries. Prabhu raised rates further, with a 6.3 per cent hike for coal transport. He said he planned to raise the amount of freight carried to 1.5 billion tonnes a year, from 1 billion tonnes at the moment.