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Everyone can build railroads, though the AI usually doesn't. But yet, it's stated that you're not able to do that until you grant them statehood so it does seem to be a bug.
Instruction booklet says you're not supposed to be able to build railroads except in states. They probably decided to change that though since India had railroads and lets face it, there's practically no way to turn India into a state.
Well don't trust the booklet, trust Memnon's "manual and strategy guide". There is quite a few things that isn't included in the game but is stated to be in the game in the original manual booklet. I my self have packed down the original manual in the case again.