Budget expectations from infrastructure sector

a strong impetus on infrastructure investments planned for the future.

By K Ravichandran

The Indian infrastructure sector is poised to sustain its healthy growth momentum over the medium term, supported by a healthy capex outlay across various infrastructure sub-segments. During FY2019-FY2025, the capital outlay by the Government of India has witnessed a robust CAGR of ~24%, primarily driven by significant outlays in the Road, Railways, and Defence sectors.

The Government of India’s (GoI) gross capital outlay at Rs. 11.1 trillion in the FY2025 Revised Budget Estimate (RBE) entails a YoY growth of 17.1% over Rs. 9.5 trillion recorded in FY2024 Provisional Actuals (PA). However, the actual capex undertaken by the GoI during April-November 2024 contracted by 12.3% to Rs. 5.1 trillion (46.2% of FY2025 RBE) from Rs. 5.9 trillion during April-November 2023 (61.7% of FY2024 PA), owing to the lull seen during the General Elections, followed by the monsoon-led slowdown in H1 FY2025. ICRA believes that a large shortfall is likely in FY2025 (Rs. 9.7 trillion) against the target (Rs. 11.1 trillion). This, however, will create an opportunity for a ~12-13% increase in capital expenditure in FY2026, amounting to ~Rs. 11 trillion, which will help support growth in the next fiscal and bring private capex.

Overall, the GoI needs to incur a capex of ~Rs. 1.5 trillion per month during December-March FY2025 to meet the FY2025 RBE, which entails a considerable expansion of ~65% on a YoY basis. This appears rather challenging, and at this juncture, ICRA expects the capex target of Rs. 11.1 trillion for FY2025 to be missed by ~Rs. 1.4 trillion. ICRA anticipates adequate allocation towards infrastructure-led sectors including roads, railways, highways, etc., in FY2026, while the outlay for interest-free capex loans can be retained at the FY2025 budgeted amount of Rs. 1.5 trillion.

Key sector-wise trend:

* Road Sector: The Central Government’s focus on road development is evident from a significant increase in the capital spending of the Ministry of Road Transport and Highways (MoRTH) by more than eight times to Rs. 2.7 trillion in FY2025 BE from Rs. 0.31 trillion in FY2014, at a CAGR of ~22%. ICRA expects the capital outlay for the road sector to increase by ~8-10% in FY2026 BE, which is likely to improve road execution. Despite the ministry spending around 55% of the FY2025 Budgetary Allocation (BA) in 8M FY2025 (compared to 65.6% during the same period in FY2024), a healthy pick-up in execution in the remainder of the year is expected, and the total spend is likely to match the targets of FY2025 BE. In line with the earlier year Budget announcements, the Government is expected to continue with the nil borrowing programme for the National Highways Authority of India (NHAI) while keeping the allocation at a healthy level.

* Railways Sector: The overall capital outlay by the Railways has been increasing over the years and touched Rs. 2.65 trillion in FY2025 BE, reporting a modest increase of 2% over Rs. 2.60 trillion in FY2024 RE. However, it has been hiked by 80% in the last five years from ~Rs. 1.5 trillion in FY2020. The funding is largely done through budgetary support, whereas incremental borrowings have been curtailed significantly in the last three years. Given the Government's focus on improving railway infrastructure, the capital outlay is expected to remain healthy in FY2026 BE. Most of the capital outlay of the Railway Ministry is towards upgrading track infrastructure and rolling stock, including passenger and goods wagons. In addition, the Government may focus on safety-related enhancements along with station modernisation.

* Power: The growth in electricity demand and the rising share of renewables in all-India power generation puts focus on developing energy storage capacities. Measures to expedite the development of battery storage and pumped hydro storage projects remain important. Furthermore, an increase in the BA for the PM Surya Ghar Yojana from Rs. 62.5 billion in FY2025 is expected, amid strong demand for rooftop installations from the residential segment. Also, an increase in BA for smart metering remains important to scale up installations and improve the operating efficiencies of state distribution utilities.

* Steel: Domestic steel demand has been growing at a robust pace over the past four years, largely aided by the Central Government’s capex drive. In a scenario where private capex activity is expected to remain modest, the continuation of large Government capex remains important for steel demand. On the trade front, steel companies would welcome any duty protection measures, like a hike in basic customs duty, to alleviate the import pressure to some extent. Moreover, any fiscal incentive for supporting green steel production is also eagerly awaited.

Other than the focus on capital outlay, asset monetisation under the National Monetisation Pipeline (NMP) will also be tracked, which can help bridge the shortfall in financing of the National Investment Pipeline. Till June 2024, ~Rs. 3.9 trillion was monetised, against the initial timeline to achieve Rs. 6.0 trillion by March 2025, which looks like a daunting task. Hence, announcements related to the acceleration of achievement of the same can also be expected from the Budget.

Permitting some reputed public sector enterprises to raise long-term funds through Infrastructure Bonds or Tax-free Bonds may also support funding for the infrastructure sector. Measures towards further improvement in the regulatory environment, including speeding up the dispute resolution process, are expected to revive private sector interest in taking up new projects.

Overall, a combination of increased budgetary allocation, planned asset monetisation, and long-term financing/favourable regulatory changes is expected from the Budget, which will put a strong impetus on infrastructure investments planned for the future.

(K Ravichandran, Chief Ratings Officer at ICRA Limited.)

Views are personal, and do not represent the stand of this publication.