The wrong track

Reneging on GE's contract would send the wrong signals

Railway Minister Piyush Goyal’s ambition of fully electrifying the Indian Railways’ network of 66,687 route km is an interesting idea. Within days of taking charge of his new portfolio, Mr Goyal said 100 per cent electrification would save the country foreign exchange spent on imported diesel and would increase reliance on “self-sufficient” domestic electricity generation. It is a different matter, however, that full electrification is a feat no major railway network has achieved. Even in the European rail network, which is predominantly electric traction because of the availability of cheap power, almost a third continues to operate on diesel. But the bigger issue is the implicit message the minister has sent to the global investment community. In the full-electrification scenario, he says he sees no need for diesel locomotives. By implication, therefore, Mr Goyal, who was power minister till recently, has raised doubts about General Electric’s upcoming $2.6-billion factory, with its 10-year contract to supply the railway ministry with 1,000 diesel locomotives.

In doing so, he has delivered a double whammy to two of Prime Minister Narendra Modi’s key projects. The first is the Make in India programme, under the aegis of which this government had inaugurated with due fanfare in 2015 diesel and electric locomotive projects by GE and Alstom, respectively, both in the jobs-scarce state of Bihar. The second is Mr Modi’s Lok Sabha campaign promise of delivering jobs and “development”. Together with Alstom’s electric locomotive factory in Bihar, the two contracts, amounting to investments worth Rs 40,000 crore, hold out the prospect of creating thousands of jobs – direct and indirect – thanks to stiff localisation targets that could create the kind of supply chain eco-system that has transformed automobile hubs in Manesar and Pune. Scrapping the GE project at this stage would be damagingly disruptive because the conglomerate – which had to wait six long controversy-ridden years to get going in the first place – has gone some way down the track to production. Next month, the first of the 100 locomotives to be imported under the terms of the 10-year contract will roll off the docks, and a year from now the first Made in India locomotive will roll off the Marhaura production line. Supply orders worth $1 billion have been placed.

Crucially, GE has signed the contract with the government, not a state-owned corporation or even a private one, so reneging on it has consequences that will inevitably reverberate worldwide. Small wonder, then, that the issue has escalated to GE’s Boston, Massachusetts, global headquarters, which issued a veiled threat of “substantial fees” for which the sovereign signatory would be liable if the terms of the contract were altered. Taken together with the issue of retrospective tax on sales of Indian assets between foreign firms, which has been in play for almost a decade now, India’s reputation as a foreign direct investment-friendly destination has remained shaky at best. Reneging on the GE contract – or even suggesting that possibility – would be the worst possible outcome at a time when the economy faces the prospect of several more quarters of languid growth and global investors are encouraged to look elsewhere.