Big Plans: Key trends and outlook for the railway sector

Key trends and outlook for the railway sector

The railway sector has seen incremental growth in the past few years and is now gearing up to take a quantum leap in in­fra­structure development. While India has one of the largest railway networks in the world, it needs to revamp it and extend it to places where rail connectivity is still an issue. Backed by the government’s push and big-ticket projects such as the high speed rail (HSR) corridor, the dedicated freight corridor (DFC) and station redevelopment, the sector is set to grow multifold.

At the recent India Infrastructure Forum event, Abhishek Gupta, assistant vice-president, ICRA, discussed the key trends and outlook for the railway sector. Excerpts…


Allocations under the Union Budget 2022-23

The railway sector is amongst the top three sectors in the country and receives the highest budgetary allocation. The capital outlay of the Ministry of Railways (MoR) increased by approximately 58 per cent to Rs 2.34 trillion (revised estimate) in 2020-21, despite Covid-related challenges and disruptions during the year. The central government extended strong support to the railway sector by making huge allocations to it; hence, the progress of ongoing and upcoming projects was not hampered. However, as per the revised estimates, the capex is estimated to have moderated in 2021-22. The overall budgetary support from the central government has witnessed a significant increase over the past two years. Further, the capital outlay for 2022-23 is budgeted to increase to Rs 2.46 trillion from Rs 2.15 trillion in 2021-22 (revised estimates).

The overall capex for 2022-23 is distributed across segments such as track infrastructure, rolling stock and other projects being undertaken by public sector undertakings (PSUs), joint ventures (JVs), special purpose vehicles, etc. Of the total capex, track infrastructure constitutes the highest share of 38 per cent. This includes allocations to major are­as of infrastructure creation/upgradation such as doubling of lines (Rs 371.5 billion), new line construction (Rs 263.24 billion), track rene­wals (Rs 120.77 billion), electrification projects (Rs 76.95 billion), safety/road over-bridge/road underbridge works (Rs 65 billion) and gauge conversion. The second highest allocation is for rolling stock, which accounts for 16 per cent share. Notable projects are be­ing undertaken by entities such as Dedicated Freight Corridor Corporation of India Limited, National High Speed Rail Corporation Limited, the Kolkata Metro Rail Corporation, other state JVs, etc. Public-private partnership (PPP) projects also form a major portion of the capital outlay.

Emerging trends in the sector

A major change observed last year is in the awarding of projects. Prior to December 2019, railway infrastructure projects were allocated to PSUs such as Rail Vikas Nigam Limited, RITES and IRCON on a cost-plus management fees basis. The PSUs would then contract/sub-contract work to private players. In a major policy change, starting October 2021, private players can also bid for railway projects directly. This initiative will increase competition, thus enabling PSUs to work efficiently. It is, therefore, a positive move for Indian Railways (IR).

Another emerging trend is the increasing uptake of PPP projects. PPP projects have witnessed success in select segments and further impetus needs to be given to this model. The railways have been able to attract private capital in core track infrastructure projects on three models – the non-government railway private line model, the JV model, and capacity augmentation with customer funding. The PPPs in rail infrastructure have mostly been in port or mine (coal/iron ore) connectivity projects and the station redevelopment programme. So far, about 2,964 km of track infrastructure, with investments of Rs 417 billion, have been crea­ted using the PPP model. Private partnership is also being explored for the eastern DFC’s Sonnagar-Gomoh section (264 km). The project is expected to be taken up on the lines of the hybrid annuity model in 2022-23. Mean­while, PPP in terminal infrastructure is likely to witness traction with both freight terminal and passenger terminal projects planned to be developed or upgraded. The PPP model will also be taken up in rolling stock. Nearly 11 per cent of the wagons are owned by the private sector under the Container Train Operator Scheme. On similar lines, a passenger train operator (PTO) model is also being explored with a concession period of nearly 35 years. The government is constantly working on conducive policy measures to help make the railway sector attractive for private sector participation.

Opportunities and outlook

The railway sector is one of the largest infrastructure sectors in the country. IR has devised a National Rail Plan (NRP), which offers significant opportunities for various stakeholders. In December 2020, IR issued the draft NRP, which outlined a long-term plan/vision (bet­ween 2022 and 2050) to develop and augment rail infrastructure capacity. The NRP is aimed at formulating strategies based on both operational capacities and commercial policy initiatives to increase the modal share of the railways in freight to 45 per cent. Sizeable capex of Rs 38 trillion has been planned under the NRP till 2050. Till 2031, track infrastructure is planned to account for over 66 per cent of the investment, followed by rolling stock at approximately 29 per cent and terminal infrastructure, which will account for the balance 5 per cent of the spend.

Going forward, an annual investment of Rs 1.8 trillion to Rs 2 trillion is expected in major projects over the next five years as per the NRP. Besides, two DFCs (the western DFC and the eastern DFC) are at advanced stages of implementation and are expected to be completed by 2023. Further, five new DFCs have been identified in the NRP, which will entail a capex of Rs 2.3 trillion and open up huge opportunities. Apart from this, the proposed HSR corridors (with an expected investment of Rs 15 trillion), and railway station redevelopment are segments that are likely to see significant traction over the medium-to-long term. Construction entities engaged in railway projects are expected to see sustained order inflows. The PPP mode is likely to be a focus area for the railways across various segments.