Came across an article on Facebook written by the founding editor of TheWire.in, Mk Venu. I see lots of people sharing the link on Facebook, so there's a chance you'll come across it too. I found the article to be intentionally misleading and hence this post.
The news is that Japan is loaning India at 0.1% interest rate payable within 50 years. This will cover 80% of the cost of the bullet train and the new track between Ahmedabad and Mumbai.
Following are some arguments from the article and my counter-arguments.
The inflation in India is expected to be higher than Japan, so Rupee will devalue against Yen in 50 years and India will pay much more in Rupees than the principal value.
-> Current inflation rate in India is 3.36. In the next 50 years, it's expected to average about 3%. This is indeed quite high compared to Japan’s. But, that’s because inflation and growth go hand in hand. The expected GDP growth rate this quarter is 7.0%. In 2020 it is expected to be about 5.7%. In 50 years we will be paying more Rupees, but that amount will most certainly be worth less. Two lakh rupees in 2017 is numerically more than One lakh was worth in 2000, but it worth a lot lesser. Japan is giving us the loan at a loss.
Japanese short term interest rates (Tokyo Inter Bank Offer Rate) is 0.06%. The interest rate offered by ten-year Japanese government bonds is 0.04%. 0.1% is very high.
-> Interbank interest rate is calculated between Tokyo banks part of a union. It will obviously be much lesser. The latest MIBOR rate (equivalent of TIBOR for Mumbai banks) is 6.17%. Good luck finding a bank ready to lend you money at 6.17% in India. Japanese government bonds offer 0.04% interest rate because they don’t expect much growth. India offers 6.5% because the expectation is that investments in India would grow in value faster than 6.5% per annum.
More importantly, generally, any such loan, even from other multilateral or bilateral development financing institutions, would cost between 3-7 per cent with a repayment period of 20-30 years.
What would be your priority? After all, there should be something called sequencing of expenditure in a nation as poor as ours.
-> A country as poor as ours cannot afford to lose this golden opportunity especially when it comes at almost no cost to us. This project is going to generate numerous jobs. The tech-transfer from Japan will improve our railway system. The super fast train route between Ahmedabad and Mumbai is going to boost trade. The return on investment on this project is going to be a lot! Refusing this would have been equivalent to a hungry person refusing food because they don’t want to waste energy eating.
Japan is giving us such favourable terms only because it needs to compete against China and France's High Speed Railway industries and boost its own economy. This deal is beneficial to India as well as Japan.