Why Budget 2025 should help NHAI tackle rising debt to sustain India's highway ambitions

Highways development has been priority for governments across the world and rightly so as it enhances connectivity, improves access to resources and markets, reduces travel time and costs thus boosting trade and commerce, attracts investments and creates jobs. Over the last decade only, more than 54,000 kms of roads have been developed and added to India’s national highways network.

NHAI’s debt servicing challenges

A large portion of the development of highways over the last decade has been funded through borrowings by National Highways Authority of India (NHAI), the lead agency for development of National Highways in India. As a result, NHAI’s cumulative outstanding debt increased to over Rs3.3 trillion in 2023-24. Over the last few years, around 18-27 per cent of NHAI’s total funds were utilized for repayment of loans and interest. Substantial fund allocation to meet debt servicing requirements, may lead to limited budget availability for new projects development; may potentially delay ongoing and planned project investments and high debts may increase borrowing costs among other issues for NHAI. Thankfully, NHAI and the government have already taken some crucial steps to reduce NHAI’s debt burden.

NHAI has stopped borrowings since FY 2023-24. Simultaneously, over the last few years, the government has ramped up the NHAI’s budget allocation towards debt servicing. NHAI also has leveraged InvIT monetisation proceeds of Rs15,700 crore generated in FY 2023-24 towards debt servicing. In fact, the government has directed that InvIT monetization proceeds be exclusively used for NHAI debt repayment. Further, NHAI is exploring other measures that can help in lowering the debt burden such as debt swapping to lower interest loans, prioritising strategic prepayment, negotiating early exit options, etc.

Growing need for highway investments

All the above initiatives are in right direction and the government’s budgetary support for NHAI is commendable and assures its commitment toward infrastructure development in the country. After all infrastructure development fuels economic growth. It is believed that investment in infrastructure has a multiplier effect of over 2.5 times in economy.

Investments in infrastructure development is also aligned with government’s ambitious vision Viksit Bharat @ 2047, to transform India to a developed nation by 2047, through economic growth, social progress, environmental sustainability and good governance. Aligned with this vision, Ministry of Road Transport and Highways (MoRTH) also aims to meet five key objectives for national highways viz. (i) access to high-speed corridor within 100-150 km to all citizens, (ii) top 10 ranking in G20 countries for high-speed corridor density, (iii) equitable access to national highways in under-developed regions, (iv) improved passenger convenience, and (v) reduction in logistics costs. In line with the above objectives, the master plan for national highways is also being prepared.

Undoubtedly, there would be requirement of investments in highways in the coming years, more specifically in development of expressways/ high-speed corridors which tend to be more expensive given that they are designed for high speeds, have multiple lanes and better safety features. Recently, eight important National High Speed Corridor development projects with overall length of 936 km and investment Rs50,655 crore have been approved by the government.

Rising maintenance expenses

Over the years, the governments have focused predominantly on new asset creation as the connectivity across regions was the primary challenge. Further, the Contractors/ Concessionaires are responsible for rectification/ maintenance of the asset till the Defects Liability Period (DLP)/ Concession period and thus, maintenance has not been the major cost item for the government. Currently, the government spends on average an annual expenditure of Rs6,000 crore maintaining NH stretches through maintenance contracts. However, over the time, the projects portfolio would gradually shift and there would be increased share of maintenance projects. For instance, there are over 55,000 km of roads (~38 per cent of total NH network) which are under DLP/ Concession period at present. Once the DLP/ Concession period ends, maintaining those stretches would be government’s responsibility. Not only those costs would be high but also recurring in nature requiring regular funding support.

Securing finances for future road assets

Given the need for new highway projects and rising maintenance expenses, it is imperative to have strategies in place to secure future investments for funding new projects and maintaining existing assets. Clearly, the government and NHAI need to look beyond budgetary support and borrowings, and explore innovative models to secure finances for investments.

Asset monetisation through TOT, InvIT and Securitisation models seem very promising and can further accelerate funding for new projects as well as maintaining the existing assets. For instance, under the TOT model, the user fee collection is assigned to the private entity via a concession agreement for a specified period against an upfront payment to the government. Further, the private entity is responsible for the operation and maintenance of the road asset during the concession period. Till date, over Rs1 trillion has already been realised through these three models, and thus these appear to be great alternatives for financing India’s future highways expansion and maintenance programmes.

While the successful implementation of the asset monetization models is very encouraging, the government could also explore other measures to secure funds for highways and infrastructure development in India. Various attempts are being made to allow greater participation from domestic pension and insurance funds in infrastructure financing, given their investment philosophy matches quite closely with cash flows from infrastructure development projects. Another hitherto underexplored mode for financing infrastructure is making it attractive for domestic capital markets. India’s capital markets have grown at an explosive pace over the last decade and introducing instruments which can help infrastructure grab a piece of the pie will greatly alleviate India’s infrastructure financing requirements.

The article has been authored by Vishal Gupta, Executive Director, Deloitte India; Ashutosh Dev, Associate Director, Deloitte India and Raghav Madan, Director, Deloitte India. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.