With crude oil prices at eight-year high, concerns over funding of infrastructure projects especially in the roads and water segments have been rising. What worries analysts is that rising energy prices may force the government to reduce the roads and infrastructure cess (RIC) once again to limit the impact on the prices of crude derivatives such as petrol and diesel. If that happens, it will reduce the RIC collection for FY23, which will in turn affect the funding for road projects.

RIC collection has been a meaningful source of funding for infrastructure projects. According to an analysis by brokerage Nomura, the RIC collection was 28.4% of the gross budgetary support (GBS) given to the National Highways Authority of India (NHAI) in FY18. The proportion increased to 32% based on FY22 estimates and is expected to shoot up to 96.8% for FY23. This underscores the importance of RIC in the roads funding.

In a report, Nomura noted that lower crude price a few years ago made it easier for the government to raise RIC to Rs 18 per litre for petrol and diesel by September 2021 from Rs 2 per litre in FY15. Once crude prices started trending upwards, it reduced RIC in November 2021 to Rs 13 per litre for petrol and to Rs 8 per litre for diesel. A further reduction amid record crude prices cannot be ruled out.

In addition, debt and interest expense of NHAI have been rising. The Nomura report pointed out that the debt of NHAI has been growing faster than the growth in toll collections. Amid these factors, the government may have to look for new sources of funding. They believe that the government may either use funds from other schemes and fund infrastructure projects or it will raise debt.

Construction stocks are under pressure with rising crude prices. On a year-to-date basis. Crude prices have gained over 47% while the ET Construction index has lost 7.6%. Analysts expect the earnings of construction companies to impact if crude prices remain high.