Saturday, September 16, 2017

Is the Bullet Train Project in India Commercially Viable?

Ever since the leaders of India and Japan signed the deal to launch a high-speed rail (more commonly called Bullet Train) project connecting Mumbai and Ahmedabad, as with any governmental announcement, there is a lot of pro and against news on the subject. Though a bullet train has been the object of our fascination for decades, no government has even attempted to even try to launch one. Now that this project is launched and conflicting news shared by different groups, I thought it would be a good idea to share my views on the topic…

Before we Begin: This is not a politically motivated article. The views in this article are those of the authors and are not endorsed or sponsored by any group/party. Kindly refrain from posting offensive comments if you happen to disagree with the contents of the article. Such comments will not be published.

What is in this article?

This article simply evaluates the financial aspects of the project to see if it makes financial sense & viability for India to embark on such a massive investment. Naysayers have also highlighted things like the route was chosen for political mileage or that some other city connection should’ve been prioritized etc. Such points have been intentionally excluded. Of course this is the starting point of a much larger collaboration between India and Japan with potential for cooperation in many other areas including defense. So, taking this project as a standalone evaluation is not fair but unfortunately when we evaluate a project for financial viability, we cannot predict what will happen 20 years from now. So, we go with what we know.

Specifics of the Project:

The cities Mumbai Ahmedabad will be connected by a high-speed bullet train which will cover the distance in less than 3 hours reaching speeds of over 300 km per hour. The project will be built using Japanese technology and 85% of the proposed 1.1 lakh crore investment is funded by Japan at a 0.1% rate of interest loan repayable over 50 years. The project is scheduled to complete by the year 2023 and is expected to carry around 750 passengers per trip which will get increased to around 1200 after a few years. Every day around 35 round trips (70 trips) are expected in the initial few years which would get increased to around 100 trips per day.  

0.1% on a loan That sounds almost free – isn’t it?

On paper yes. In a country where home loans are going at around 8-9% interest rate, a 0.1% rate of interest sounds pretty much non-existent. But, what we are ignoring is the purchasing power of the indian rupee against the Japanese Yen plus the fact that the loan has to be repaid in Yen not rupees. Inflation in Japan is very low (less than 1%) while our inflation is around 5-6% now. So, over the next 50 years, even though the interest rate is 0.1%, we need to factor-in inflation and the purchasing power of the rupee.

Even if we assume that inflation in India will average at around 3-4%, that means the rupees purchasing power will be down by 100% in roughly 30 years and potentially over 150% by the end of the loan tenure of 50 years. This means, on a loan of 88,000 crore rupees, when being repaid in Yen, will go up to approx. 1,50,000 crores by around the 20-25 year loan tenure mark. If we take the full 50 years to repay the loan, we are potentially looking at a much larger number.

Now, go back and assess if the 0.1% loan interest is still attractive…

Financial Viability of the Project

Now that we have evaluated that the loan isn’t as cheap as it sounds on paper, lets look at purely the financial viability of the project. The government is investing 1.1 lakh crores on this bullet train line. Lets try to calculate the potential price of a ticket with a few simple assumptions.

  • The government will aim to recover the investment in 50 years
  • We will go with a Government of India study from 2014 which predicts a cost of 412 crores per year to operate and maintain the bullet train line between the two cities  
  • We will assume the train will carry an average of around 1000 passengers per trip and make 100 trips in a day (and all seats will be filled)

1.1 lakh crores to be recovered in 50 years means, the train has to raise a revenue of 2200 crores every year which translates to 183 crores in a month and roughly 6.1 crores a day. Assuming 100 trips and 1000 passengers per trip, the figure works out to around Rs. 610/- per passenger. That doesn’t sound like a big ticket price right?

A study conducted by the Indian government in 2014 estimated that maintenance and operations of the bullet train track between Mumbai and Ahmedabad will cost around 412 crores per year. If we factor in this cost, the ticket price will go up to Rs. 725 per passenger.

However, the cost of 412 crores is from 2014 and by the time the track is operational in 2023, the cost is expected to go up significantly because of Inflation. If we take that into consideration, a price of approx. 1000 rupees per ticket seems more realistic.

This 1000 rupees per ticket is just to recover the initial investment. If we want the rail line to earn an income for the government at least enough to repay the loan, this number is bound to go up even more and if the government wants to earn a revenue on top of the loan amount, we are looking at an even higher figure for ticket price.

So, I think the project does not make much financial sense. Will explain why in the next section…

Why this project doesn’t make Financial Sense?

Let me start by asking you this question: Do you think that residents of Mumbai or Ahmedabad can afford a few thousand rupees on a train ticket? Or rather, I should rephrase the question – would residents of Mumbai or Ahmedabad be willing to spend a few thousand rupees on a bullet train ticket when a regular train that only takes an extra 4-5 hours at potentially 20% of the cost?

The initial few months/years, the eagerness to travel by a high-speed bullet train will make people want to spend the extra money but as time goes by, the euphoria will be replaced by reality and as with any human being, unless saving those 5 hours is ultra crucial, I would prefer to spend 80% less money and use the regular train instead.

A real life example from our Neighbours

Sri Lanka as we all know has been investing tremendously in infrastructure projects over the last decade of course with massive funding’s from the Chinese. A simple example was their ambitious attempt to build a world class airport Mattala Rajapaksa International Airport, the second largest in Sri Lanka at an investment of $209 million as a loan from the Chinese. This project is generating a revenue of $300,000 per year but they have to repay $23.6 million per year to the Chinese for the next 8 years for the loan they offered to actually build the airport. 

The Lankans also invested $1.1 billion to build a deep water port at Hambantota along with a four lane expressway connecting the city with neighboring cities all with loans from the Chinese. With the port not attracting as many ships as was originally planned and the expressway attracting more elephants than trucks, both projects have generated little to no revenue for the country.

With a burgeoning debt to the Chinese, the government of Sri Lanka has agreed to give 70% equity stake in the port over 99 years in exchange for writing off $1.1 billion in loan and a further loan of $600 million to make the port commercially viable.

This port and the airport are a classic example of wanting to build something spectacular without calculating the financial viability of the project and then ending up in deep debt while trying to borrow more money to make the project commercially viable. Am worried that we are embarking on a journey of similar fate with the bullet train.

Some last words:

We are potentially embarking on a venture that is going to increase our national debt that needs to be repaid by future generations by massive proportions. Am worried that we are doing an injustice to them by incurring such humongous loans.

Hope the government has a plan to make this a successful project and not fall into an endless debt trap with the Japanese.  

Monday, September 11, 2017

Was Demonetization really a Success?

Its been almost a year since the Demonetisation announcement by the Indian prime minister but the argument has actually not subsided on whether it was a success or a failure. The pro BJP faction is sharing statistics to justify the decision and glorify the outcome while the anti BJP faction is doing just the opposite. To add on, experts from many different walks of the world have shared their opinion which sadly too has been corrupted by the biased narrative.  

So, the common man is confused – was this a success or a failure? That is what I am hoping to help you understand by the end of this article.

Why this article?

Ever since our GDP Growth slowdown news came out, people have been quick to blame Demonetization. I wrote an article a few days back explaining the reason why our GDP is slowing down. But, since people are blaming Demonetization, the BJP Supporters have retaliated by sharing news/statistics on how it was needed or useful. A good friend of mine sent me the list and wanted me to comment whether they are true or not. So, I thought why not write an article since its going to be a lengthy response… Here we go.

How this article is structured

I will be listing down all those demonetization was successful because arguments one by one and adding my opinion on whether it is True or not.

Before we begin: This is not a politically motivated article. The views in this article are entirely the authors and are not a representation of any group or faction. If you disagree with the views expressed in this article, kindly refrain from posting derogatory or abusive comments. Such comments WILL NOT be published.

Argument 1: It was done to catch Black Money and was a success Partially True

This was of course the major reason that was cited when this drastic decision was announced. Yes, any transaction in cash cannot be tracked by the tax-man (unless the shopkeeper actually gives a receipt and declares the income) and with lax enforcement by corrupt officials, the shadow cash economy has been booming for years in India. By making old currency notes invalid, people holding on to stacks of cash have no choice but to deposit or exchange it in a bank which means, it will be caught.

Unfortunately, our citizens are smarter when it comes to money and hiding the taxable income. People used their relatives accounts, hawala brokers who in-turn used proxies to deposit large amounts as smaller values into different accounts, bank officials helped the rich & powerful and in the end nearly 99% of the demonetized notes found their way back into the Banks.

The government hasn’t released accurate statistics on how many suspicious transactions have been taken up for investigation or the quantum of black money that was unearthed. Until these figures are made public, I would consider this argument as a only Partially True

Argument 2: It has prevented the growth of Black Money - Invalid

By cancelling old denominations, and re-introducing new ones, there was only a temporary jolt to the growth of black money. Once people get their hands on the new currency notes (supply of new currency notes has pretty much normalized across the country) they will continue to resort to going back to their old ways.

Citing Demonetization as something that would prevent the growth of black money is like giving Amrutanjan to a guy suffering from Migraine and telling him that this is the permanent cure for his ailment. It is merely a temporary relief and not a permanent cure.

In fact, I would actually call this an Invalid argument that doesn’t require a True or False comment.

Argument 3: It has expanded the tax payer base - Partially True

This is yet another legit explanation or argument. Cash, when deposited into a bank account effectively starts a paper-trail for the tax man to start looking into. Any individual who can deposit 1 or 2 lakhs into their bank account should have had some income sources. By reviewing these suspect transactions, the government effectively would expand the tax payer base (when done right of course).

As mentioned in argument 1 until the statistics are released by the government on exactly how many new tax payers were identified, I would consider this argument too as partially true at best.

Note: The messages circulated make claims about potentially 2.9 lakh crores worth of money being investigated by the government and make hypotheticals to say, even if 50% of this is black money, government will get X crores as tax revenue. Until the statistics are actually released by the Government of India, I would take these news sharing’s with a pinch of salt and consider them as only partially true.

Argument 4:  It has brought down the volume of high denomination currency notes - False

Similar to argument 2, this one too is an invalid argument. The government has introduced 2000 rupee notes instead of old 500 and 1000 denominations. So, instead of carrying 1 lakh in their pocket with 100 notes of 1000 each, a guy wishing to conceal cash can now carry 2 lakhs with 100 notes of 2000 each. Until these 2000’s are phased out (not sure when) this argument doesn’t hold true. So, am not going into the true or false point

Argument 5: It has infused cash from the parallel economy into the banking system - True

This is really and truly a success for the Demonetization exercise. Because of the exercise, banks in India got a real massive influx of deposits which was very beneficial for them. Even in my prior article on the detailed impact of demonetization I had mentioned that this move will result in a positive outlook for banks. So, this one is definitely a True

Argument 6: It has brought down interest rates - True

As with the cash influx for banks, in my prior article on detailed impact ofdemonetization, I had mentioned that this move will result in interest rates going down – which has actually happened. So, this one too is definitely a True.

Argument 7: It has increased household savings - False

As with arguments 2 & 4, I would consider this an invalid argument. This is merely a feel-good point added to a message to give the reader a sense of satisfaction. Money got deposited into a bank account and was then most likely withdrawn or spent. How can a move that invalidates a currency denomination result in increased household savings? This one is definitely False

Argument 8: It has crashed the rising land prices and made housing affordable - False

The indian real estate had grown at an unsustainable pace from the year 2000 onwards and had already hit a plateau by early 2016. An excess supply and refusal by builder to cut their profits resulted in a situation where demand was slowing and prices did not go up. It was more like a flat line maybe trending lower.

Demonetization did not result in a drastic reduction in housing prices and in fact the prices are pretty much where they were in 2016 prior to demonetization. So, this argument is False.  

Argument 9: Has facilitated the growth of real economy by bringing in the shadow economy into its fold - False

If Demonetization did in fact bring in the shadow economy which was suspected to be a good % of our GDP, the GDP growth figures over the last 3 quarters should’ve seen an upward trend. Unfortunately the trend has been negative. Even in my earlier article on the impact of demonetization on Economy & GDP, I had mentioned that there will only be a short-term negative impact and things should improve in the long run but I was unaware of the impending surprises like GST which further impacted the recovery process.

So for now, this argument is very much False. Until GDP growth statistics show a positive movement, believing this argument is just impossible  

Argument 10: It has eliminated fake currency and curb terror funding - False

Again, this was a one time True point but not a permanent solution. Fake racketeers will continue to figure out ways to produce fake currency notes no matter how many times the government demonetizes notes. So, this argument is false because terrorist activities still happen along our border and various parts of the country.

Final Tally:

The Final tally of the arguments is as follows:

  • False: 4
  • True: 2
  • Partially True: 2
  • Invalid: 2

Only 2 of the 10 arguments are True with 2 more being Partially True. The rest are either False or Invalid. Not to mention the months of inconvenience to the citizens or the approx 5000 crores that was actually spent in printing these new notes and bringing them into circulation. 

So, for now, I wouldn’t consider Demonetization a Success. Infact, the falling GDP growth, reduced industrial and agricultural output is a clear indication that decisions like this have significantly impacted our economy.

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