The Mumbai-Ahmedabad Bullet Train Is Many Things, But It’s Not Free

Over 50 years, the loan repayment value will be much higher based on the inflation differential, which is bound to persist between Japan and India.

narendra modi, bullet train, shinzo abe

Despite what our prime minister says, the train isn’t virtually free of cost. Credit: Reuters

Prime Minister Narendra Modi has claimed the bullet train offered to India by Japan is virtually free of cost. A 50-year yen loan amounting to Rs 88,000 crore at 0.1 % interest is being described by the prime minister as free of cost. This is patently absurd.

India can have as many bullet trains as it wants on these terms from the Japanese, but nobody should be misled into believing they are free. For one, India may have to repay much more than Rs 88,000 crore over a 50-year period because the rupee will most likely depreciate against the Japanese yen over a long period.

Why is this? Simply put, it’s because the exchange rate between the currencies of two countries is determined by their inflation differential. 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.

Also Read: Modi, Abe Lay Foundation Stone for India’s First Bullet Train Project

Over 50 years, the repayment value will be much higher based on the inflation differential, which is bound to persist between Japan and India because the latter is a rising economy with a sizeable poor population and is striving to become a middle to high income country over the next few decades. India, therefore, could end up paying a much higher value of rupee debt over 50 years. If this happens then we are not being fair to the successive generations, which will be saddled with this high debt component. Inter-generational equity is an important aspect of national debt accumulation even if it is a yen loan coming at 0.1% interest rate.

Prime Minister Narendra Modi with his Japanese counterpart, Shinzo Abe, at an exhibition in Gandhinagar, Gujarat. Photo courtesy: PMO India

Therefore, Modi must be careful while describing the 50-year yen loan as “in a way, free”. I remember some Indian corporate houses had shown similar enthusiasm two decades ago by raising international debt via 50-year dollar bonds using the same logic that such money need not be repaid over a long period. Subsequently when the rupee weakened against the dollar – by 50% – over 15 years, the same family-owned business houses got wise and prepaid large portions of the money. Perhaps they did not want to saddle their next generations with such risky loans. This logic holds even truer for countries.

This loan is just for a short route – Ahmedabad to Mumbai. As is being anticipated, if the Japanese build three more such projects connecting other cities in the south, north or east, one can well imagine the total foreign debt burden that will arise. After all, the loans will have to be paid back with the exchange risk built into it. The yen is considered the most volatile currency among all the hard currencies today.

Another factor to be considered is that 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. This perspective cannot be lost sight of. So what you pay back to Japan in rupee terms will be way higher than what you borrow. There is no free lunch, as the saying goes.

Also Read: What Explains the High Number of Railway Accidents?

One last point that needs to be emphasised is the bullet train project covering just Ahmedabad and Mumbai will cost Rs 1,10,000 crore. Just compare this with former rail minister Suresh Prabhu’s first Budget which projected a five year expenditure of a similar amount for network expansion in the entire country. Or a similar amount for strengthening safety over five years.

What would be your priority? After all, there should be something called sequencing of expenditure in a nation as poor as ours. 

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  • Anjan Basu

    Beautifully argued! The fact that the Bullet Train in today’s India only indicates a flawed prioritisation of our needs ( as also of the allocation of our scarce resources) is common sense. But the fact that the financial cost India will incur on this escapade is also going to be enormous is a very important perspective that we cannot lose sight of.

    • kujur bachchan

      A reading of fine prints and annexes will reveal the total financial implication. And, when one uses ‘tactical prioritisation’, one does not have to worry over the scarcity of resources.

  • Ashok Kulkarni

    Very well put. But what is the reason this government is going after this project? Are there any political or diplomatic advantages? Everyone knows Bullet Train is not our country’s priority. Then WHY?

    • Anjan Basu

      It may not be on the list of the country’s ( legitimate) priorities. But obviously it is high on the BJP’s/ current govt’s priorities. Because the only way they can operate is by lining up an endless series of spectacular ‘events’, glitzy and ‘aspirational’, devoid of all core value but appealing to the eye and to the imagination of the urban middle classes that seek to see India as the new megapolis. ( It doesn’t matter that in the delivery of the very basic services to our citizenry, we are way behind some of our poorer neighbours — Sri Lanka, Nepal and even Bangladesh.) The ‘why’ that you are raising is very pertinent: but to an utterly cynical dispensation that is hooked to its ‘superpower’ fantasy, such questions are meaningless, maybe even ‘anti-national’.

      • subhasis ghosh

        I hope that you are boycotting travelling by metro rail in any Indian city. And please avoid the new airports also. They are too glitzy for your tastes.

        • Anjan Basu

          The fallacy here is this: the metro is a mass transit system that seeks to cater to EVERYBODY at a reasonable cost, unlike the Bullet Train which, in the context of today’s India, is going to be for only the well-off. Is it very difficult to understand this difference? I believe it is not, unless one is determined not to see reason. And worrying about my ‘tastes’ may be pointless here. My reservations about the BT escapade stem from questions of principle as I see them, not from my ( undoubtedly genuine) distaste for empty hype and ignorant chest-thumping.

  • kujur bachchan

    Mr Narendra Modi, who eats, drinks and sleeps elections, has cunningly floated a carefully worded blatant lie – ‘virtually free of cost bullet train’ – for the consumption of the electorate of Gujarat. This sophistry might prove to be as powerfully effective as the subterfuge – of bringing back so much black money that Rs 15,00000 could/shall be deposited in everyone’s’ account – Mr Modi used during campaigning for 2014 elections. The bhakts and slaves (media included) are all out there to ensure that the electorate falls for it hook, line and sinker. It is another matter that Mr Amit Shah will describe it as an election jumla, but only after the elections are over.

    • subhasis ghosh

      When the first metro of the country was being built in Calcutta, the Left Front government did everything possible to stall the project. What do you think is the opinion of the people today in Calcutta about the metro, useful or useless? Please think about it.

      • kujur bachchan

        Did I say anything about the usefulness or uselessness of the so-called bullet train? Sir, kindly read carefully.

  • alok asthana

    Put simply, it is a mother making a budget in which she plans to buy a car (something that will be mainly be used by her and her husband), while the children in the family are going hungry 3 days a week and some of them have to be pulled out of school for not being able to pay the fee. Such a mother needs to be sorted out. So should be Modi.

  • S.N.Iyer

    The bullet train as a ‘free gift ‘ is like offering a poor man who owns a bicycle to be given a Rolls Royce or a palace instead of his own shack. Does he need a job, good price for his crops, or try and buy the food to eat? Or the ego trip or something he owns which he doesn’t need. I hope Modi will at least be happy as the trains may be named after him

  • Shridhar

    The main issue here can this project make profits in its operations, if yes we should go for it. If we are so sure about viability of this project why cant we ask private parties to invest in this, so that Govt can invest the money in priority sector.

    • kujur bachchan

      Interesting suggestion. Workable too.

  • Anjan Basu

    You are right. But won’t we, as common citizens, still raise our voice against wasteful and unproductive public expenditure?

  • Anjan Basu

    It is true that public protests can sometimes be ill-informed, limited as perceptions often are by lived experience. But, don’t you see a fundamental difference between the city metro and the Bullet Train? Metro systems serve as mass transit at reasonable cost, while the BT in the current Indian context will serve only the well-off. The relative cost of the BT is also humongous, while it will cater only to a tiny minority who, in any case, are being served today by the airline industry.

  • Anjan Basu

    You are right, but here the choice really seemed to me to be between the very expensive project of a bullet train that can cater to a tiny segment of railway users and a prioritised upgradation/ replacement of our doddering railway infrastructure. Our resources are scarce, our poverty is terrifying, our needs are many and big: should we then permit ourselves the luxury of investing big on a low-priority project at the cost of maintenance and repair of our existing infrastructure? Such questions would not obviously arise if we were a rich country like Japan, or at least a prosperous country like China.