DIPP to Weigh FDI in Railways Next Week

March 3, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – India’s Department of Industrial Policy & Promotion (DIPP) announced today that it will fast-track a decision on foreign direct investment (FDI) in railways next week, in a push intended to expedite the matter before general elections are scheduled.

The announcement that the cabinet will seek 100 percent FDI approval from the DIPP comes several weeks after the release of India’s 2014 railway budget.

Hesitation to open India’s railway industry to FDI stems primarily from security concerns on the part of the DIPP and the Railways Ministry. To alleviate these concerns, without singling out Chinese investment, the DIPP is expected to require that all FDI proposals in the sector be vetted by a core group of technical and security experts before approval.

Legally, however, FDI proposals would fall under the automatic approval route and investors would not be required to seek the approval of the Foreign Investment Promotion Board (FIPB).

“The security concerns raised are valid. We have addressed them to the best of our ability and asked for an internal core committee to look at all investment proposals, rather than singling out Chinese investment. It should likely be taken up next week by the Cabinet,” said a senior DIPP official quoted in The Economic Times.

Discussion early last month on railway FDI focused on similar security concerns including unresolved border disputes with China, and the possibility of prohibiting Chinese investment in railways located in the border regions of Jammu & Kashmir as well as the North Eastern states.

Other concerns surrounding FDI in the railway sector stem from unease on the part of railway unions that such a move would lead to increased privatization and higher transportation costs for passengers.

After FDI into India slowed considerably in the April-November period of the current fiscal year, PM Singh pledged last month that India would push through further FDI reforms in e-commerce, railways and construction.

The Confederation of Indian Industry (CII) lauded this effort, calling for the revamping and restructuring of India’s railway system via the development of a sustainable financial model to ensure the feasibility and longevity of projects.

Roughly three weeks after India’s railway budget was approved, which left train fares and freight rates largely unchanged, the CII hopes that approving 100 percent FDI in the railway sector can ease the cash-strapped sector’s financial burden.

If approved, railway FDI is expected to attract at least US$10 billion over the next five years, and will open infrastructure such as elevated rail corridor projects, freight terminals, suburban corridors, dedicated freight lines, high-speed train systems and the procurement of rolling stock and other capacity enhancement works to foreign investors.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as as well as liaison offices in Italy and the United States.

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