The government of prime minister Narendra Modi in India is considering relaxing investment rules in the railway sector by permitting 100% FDI in high-speed train systems and dedicated freight lines. The Department of Industrial Policy and Promotion, under the Commerce and Industry Ministry, has circulated a draft cabinet note on the matter for inter-ministerial consultation.

"The department is looking at all the areas in railways where FDI can be permitted. It will help in growth of railways. Railway is a critical sector for driving India's economic growth, and it has the potential to raise GDP by more than 1%," officials told Indian newspaper The Economic Times. There is also a proposal to allow foreign investment in sub-urban corridors and freight lines connecting ports, mines and power installations.

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This proposal to relax investment is intended to fulfill the promises made by the ruling Bharatiya Janata Party during the recent national elections to improve India’s infrastructure. India has one of the largest railway networks in the world. Mr Modi has held out a vision of a network of bullet trains – modeled on the Japanese Tokaido Shinkansen – that will connect various metropolises, much like the national highways that were built during the tenure of India's former prime minister, Atal Behari Vajpayee, between 1998 and 2004. These connected cities thus become part of one single economic zone and, in turn, boost economic growth. Japanese investors in particular are excited about this proposal of building high-speed bullet trains.

Questions are bound to be raised, however, over whether India can afford to build such a sophisticated network of high-speed trains as in Japan. The fear is that with the low per capita incomes, Indians may not be able to afford the high fares to ride such trains. This project, which entails costs reaching up to $130m per kilometre, can only take off if the government can heavily subsidise it. Unfortunately, this is precisely what the resource-strapped government cannot do right now.
Even without the high-speed train proposal, the railway network urgently requires modernisation, including replacing the ageing rolling stock and rail lines, whose tab is worth $833m. It is to partly fund such requirements that the new government recently raised rail passenger and freight charges, a move that was politically unpopular. Allowing 100% FDI clearly is intended to make it feasible to fulfill a poll promise.

N Chandra Mohan is a business and economics commentator based in New Delhi