National Highways Infra Trust Management Discussions

Outlook on Indian Economy

Indian economy has been on a steady growth trajectory, poised to become the 3^rd largest economy globally with a projected Gross Domestic Product("GDP") of USD 8 trillion by 2030 and USD 30-35 trillion by 2047¹. Over the past decade, significant policy actions by the Government of India have revolutionized the countrys infrastructure and financial sectors. These reforms have fostered inclusive development, elevating India to the 5^th largest economy with a GDP of USD 3.7 trillion.

Despite global economic uncertainties, geopolitical tensions from the Russia-Ukraine War, supply chain disruptions due to the Red Sea Crisis, and tightening financial conditions in major economies like the US, Indias domestic demand has remained relatively resilient.

For the FY 2023-24, Indias real GDP growth has settled at 8.2%. However, ?nfluenced by high interest rates and a strategic reduction in fiscal stimulus, the GDP is projected to moderate to 6.8% in fiscal 2025².

The proposed measures are part of a broader effort to maintain economic stability and long-term growth. Importantly, continued government support for capital expenditures and rural incomes is anticipated to play a significant role in sustaining economic momentum.

Outlook on Inflation (CPI):

Headline Consumer Price Index ("CPI") inflation eased to an estimated 5.5% this fiscal from 6.7% in fiscal 2023. In FY25, inflation is expected to decline further to 4.5% on average³. Assuming a normal Southwest monsoon and healthy agricultural output, food inflation, which forms 39% share in the CPI basket, is expected to trend downwards. Core inflation is forecasted to stay benign but could see some statistical uptick given the low base in the fiscal 2024.

Unpredictable weather shocks remain the biggest risk to the inflation outlook which will be partially cushioned through government interventions to minimise the adverse impact.

As per the Ministry of Commerce and Industry, Wholesale Price Index ("WPI") inflation declined to 0.86% in December 2023; largely led by the WPI-food and core (manufactured non-food products) items.

Indias Push for Infrastructure

India has an ambitious vision for 2047, the year when it will celebrate 100 years of independence. The vision aspires transforming the nation into a developed country with world-class infrastructure and facilities. The Government of India is expected to undertake multiple initiatives to revolutionize the nations infrastructure which may include High Speed Road and Rail Network, Expansion and setting up new Major & Non-Major Ports and Multimodal Logistics Parks.

1. Capital Expenditure

The progress of National Highways ("NH") in India has been a remarkable decadal growth story aligned with a significant increase in budget allocation and construction pace. In the last few years, the governments capital expenditure ("capex") has significantly increased, indicating a robust recovery in the investment cycle. The Centres budgetary capex surged from 2.5 lakh crore in fiscal 2016 to 9.6 lakh crore in fiscal 2024, nearly fourfold. At the same time, State capex also grew by 2.2 times during this period. From averaging 1.7% of GDP from fiscal 2016 to 2020, the Centres capex has nearly doubled to 3.4% of GDP, planned for the upcoming fiscal.

Further, the Government of India has been actively focusing on enhancing the transport infrastructure⁴, which is evident from 2.5 times increase in capital expenditure in transport infrastructure over the years from 2.1 lakh crore in 2021-22 to 5.3 lakh crore budgeted in 2024-2025⁵. This increase is particularly focused on enhancing physical connectivity enabling in reduction of the logistics costs and boost competitiveness. Primary areas of expenditure include rural roads, highways, airports, and railways.

3 CRISIL Research- MI&A

4 Budget pertains towards Ministry of Road, Transport and Highways and Ministry of Railways

5 https://www.indiabudget.gov.in/doc/bh1.pdf

Further, a raft of significant reforms has been introduced by the government in recent years to bolster Core Infrastructure growth in India includes streamlining of project identification and structuring through the National Infrastructure Pipeline ("NIP"), establishment of the dedicated National Bank for Financing Infrastructure and Development ("NaBFlD") to facilit?te financing for these projects, and introduction of the PM Gati Shakti scheme aimed to improve inter-ministerial coordination and project execution efficiency. Additionally, the National Monetisation Pipeline ("NMP") has facilitated leveraging of the value of public assets for infrastructure development. Collectively, these reforms are targeted to create a favourable environment for the healthy growth of infrastructure in the country and achieve its 2047 targets.

2. Focus on Infrastructure Investment

Development of the National Highways

National Highways constitute around 2% (1,46,145 km) of the countrys road network, but carry about 40% of the total road traffic. NHAI, the nodal agency under the MoRTH, is responsible for building, maintaining and upgrading over 82,000 kms of NHs. To develop the NH network, NHAI launched the National Highways Development Project ("NHDP") in the year 1998 spread over seven phases and incorporates private sector involvement through Engineering Procurement and Construction ("EPC"), Build Operate Transfer ("BOT"), and Hybrid Annuity Model ("HAM") contracts.

NHDP was followed by Bharatmala Pariyojana ("BMP" - flagship program for National Highways being implemented by MoRTH), 26,425 km in length has already been awarded with a total capital cost of 8.53

lakh crore (USD 103 billion) including ~6,800 km of high-speed corridors. Out of 26,425 km, ~52% of projects by total cost are being executed under PPP mode with 2 lakh crore (USD 24 billion) private investment.

Further, the MoRTH is expected to set out pipelines of assets under the Vision 2047 Master Plan which may include construction of over 750,00 km of highways including 50,000 km high-speed corridor (access controlled) by 2047 to cater high-speed corridor density of India, Equitable access to National Highways especially in under- developed regions, provide world class Passenger Amenities and target reduction in logistics cost. Vision 2047 is expected to incorporate the elements of BMP and take highway construction activity to a new level.

Stable NHAI Awarding

NHAI awarding has witnessed a rise from 2,222 km in fiscal 2019 to 6,003 km in fiscal 2023 due to favourable changes in the BOT and HAM agreements. Relaxation of bidder eligibility criteria by NHAI indicates a policy shift to enhance private-sector participation and consequently, catalyse the award of HAM projects. While the share of HAM in awarding increased slightly from 54% in fiscal 2022 to 56% in fiscal 2023 the EPC share remained unchanged at 43%.

NHAI is expected to award ~4,000-4,500 kms in fiscal 2025⁶, however the respective shares of HAM, EPC and BOT in the total awarding are expected to remain at similar levels vis-vis fiscal 2024. Over the medium term, it is expected that the NHAI would continue to award -5,000 kms per year on an average between fiscals 2024 and 2028

Financing Trends

It is estimated that 17-19 lakh crore will be invested in national highways between fiscals 2023 and 2027, with public funds dominating the overall spending⁷. The NHAI awarding under the HAM and on cash-contract basis is dependent on an active asset monetisation programme.

As part of asset monetisation initiatives, highway sector has been successful in monetization of completed assets (having operational history of atleast one year) through Toll-Operate-Transfer ("ToT") and InvIT. Till date, USD 8.2 Bn (^ 0.68 lakh crore) has been raised by MoRTH/NHAI leveraging TOT & InvIT for over 3,800 km of highways. Further, NHAI is targeting to unlock over 2,700 km of its operating toll roads through TOT and InvIT during FY 2024-25.

According to SEBI Database⁸, InvIT and Real Estate Imvestment Trust ("REIT") have raised over 39,023.6,000 crore during FY 2023-24. Further, going forward, the road sector is likely to be a major beneficiary of the new ?nflows.

Indian companies participating in the asset monetisation are part of the large developer/concessionaire groups and InvITs with their ability to raise funds from both foreign and domestic investors/markets at competitive rates. This could lead to stronger flow of funds from the Foreign Direct Investment ("FDI") and capital / corporate bond markets.

It has been demonstrated through continued interest from the foreign investment inflows with India receiving a total FDI inflow of USD 70.9 billion in the financial year 2023-24.

Out of total FDI flows, FDI equity inflow received during FY 2023-24 stood at USD 44.4 billion. The FDI inflow in construction (infrastructure activities), construction development, and power sectors doubled in 2023-24. Construction (infrastructure activities) FDI equity inflow in FY 24 increased by 1.5 times standing at USD 4.2 billion from USD 3.2 billion in FY22⁹.

Going forward, support of the foreign and domestic investors, into asset categories within the National Monetisation Pipeline, will be crucial for achieving successful monetization goals set by the Government. Based on the anticipated investment trends, Roads InvITs are poised to make an attractive investment class for these funds, offering stable returns and aligning with their long-term investment strategies.

Positive changes in Model Concession Agreements ("MCA")

Recent amendments to the MCA for TOT and BOT toll models demonstrate openness to the views of the investor community and refinement of concession documents and bidding strategy from time to time.

Reform in TOT MCA for modification of traffic variance bands from 20% to 5% and revising the test points or target points to every fifth year during the concession period are expected to enhance the adaptability to traffic performance variations and revenue target evaluations.

Similarly, increasing the minimum vacant access and Right of Way ("RoW") from 80% to 90% and stricter clauses are introduced to curb project implementation delays, are encouraging revisions for the serious BOT developers.

These strategic adjustments in both TOT and BOT Toll models are targeted to attract more investment by aligning project timelines more closely with investor and operational realities, ensuring that infrastructure development progresses efficiently and effectively.

Road Ahead

The Indian government has demonstrated robust commitment to enhancing the nations infrastructure through strategic capital expenditure and regulatory reforms. The modifications to the MCA for both TOT and BOT toll models, including more frequent evaluations and revised toll collection thresholds, are designed to bolster investor confidence and streamline project implementations. These changes, along with significant investment in core infrastructure sectors and a focused approach on smoother project delivery, are set to drive substantial growth across Indias highways sector. NHAI has actively played a crucial role in the NMP so far, which will be continued through TOT and InvIT. This holistic approach ensures that infrastructure development not only progresses efficiently but also aligns with the broader economic growth objective of becoming a USD 8 trillion economy by 2030.