Scrapping GE contract may cost Indian Railways Rs 1,300 crore; dent 'Make in India'

Indian Railways deal with General Electric to produce diesel locomotives in Bihar is in limbo. The deal, which was signed in 2015 under the 'Make in India' initiative when Suresh Prabhu headed the railway ministry, is likely to be scrapped or modified as the new Railway Minister Piyush Goyal is eyeing fully electrified network for railways.

According to a report in The Economic Times, the government is looking to reach an accord with General Electric over the diesel locomotive project as Indian Railways faces a potential penalty of Rs 1,300 crore if it terminates the contract.

However, the Indian Railways doesn't consider Rs 1,300 crore liability as a large amount as compared to savings it would make on lesser fuel costs if the network is fully electrified. The government still expects to reach an accord with GE without resorting to termination, the report said.

"As per the exit clause, we'll have to pay Rs 1,300 crore to the company and we'll also lose equity in the project. It's not a huge amount given that the savings on account of 100 per cent electrification would be Rs 8,000 crore a year. However, we have no intention of terminating the project and have already offered GE to use the same facility to manufacture either electric locos among many other options," the report quoted a railway official, as saying.

GE has warned the Indian government of huge job losses if the project is terminated. In India, electric engines are mainly used for passenger trains, while diesel is used for freight trains.

GE was awarded the $2.6 billion contract in 2015 to supply 1,000 diesel locomotives. This was touted as the biggest foreign direct investment in India by a US company. The deal was the first contract given to a foreign firm after government cleared 100 per cent FDI in railways.

GE has already sent its first diesel locomotive to India and is about to finish the work on its factory in Bihar. The project has created around 1,000 jobs at the plant and a maintenance shed, and 5,000 jobs in the supplier network.

In a statement, General ELectric said the government's change would put future foreign investment at risk. "An alteration of this contract will have serious impact on job creation and skills development, and cause the government to incur substantial costs," it said. "This will also undermine government's signature 'Make in India' initiative."

When GE was awarded the contract to build a factory at Marhowra in Bihar, French transport giant Alstom was also given a contract to supply 800 electric locomotives and to build an electric locomotive factory in Madhepura, Bihar for $3 billion.