Funding the Railways: Why Suresh Prabhu is on to something

The Life Insurance Corporation of India (LIC) signing an agreement with the Indian railways to bring in Rs 1,50,000 crore (USD 25 billion) of investments over the next five years seems to be 'prabhu's' answer to all problems (capital constraints) faced by railway minister Suresh Prabhu.

The clamour for raising public investment is growing by the day, especially in railways. This gained further momentum post the government’s economic survey which pegged railways multiplier effect at 5 or more, which means for every Re 1 increase in railways investment, there would be an increase in economy-wide output by Rs 5, according to a Deutsche Bank report.

In the Railway Budget presentation, Prabhu talked about an ambitious USD 140 billion target to reboot Indian railways, but a question mark emerged on how he plans to finance this ambitious target, given the fiscal constraints.

According to the report, the LIC decision is a landmark development for two reasons: first and the obvious one is it will help the government bump up its resources for quick execution of projects, and second, it shows how the government is managing to tie up budgetary resources for financing public investment in a meaningful manner. This in turn can pull greater private investment without jeopardizing India’s public debt dynamics, the report adds.

"The Indian Railways will need to build the capacity to carry more than 3x the current traffic of both passengers as well as freight by building high speed dedicated freight corridors and faster trains"," said the report This will be critical for both the Make in India programme and dramatically improve India’s Incremental Capital Output ratio.