 "Highways: UP's path to become first $1 trn state")
India’s infrastructure sector stands at a pivotal juncture, shaped by a renewed emphasis on crowding in private investment in infrastructure, following several years of strong budgetary support from the central government.
In financial year 2025-2026 (FY26), infrastructure capital expenditure (capex) is expected to grow 6-8 per cent year-on-year (Y-o-Y), thereby normalising to the average growth of 8 per cent Y-o-Y.
In FY26, the roads sector, which is expected to grow 5-6 per cent Y-o-Y, will dominate the capex share despite a decline in total kilometres of national highways to be constructed. Capex will be driven by a pipeline of wider four and six-lane highways, six and eight-lane expressways and high-speed corridor projects.
Between FY26 and FY30, infrastructure capex is expected to rise to ₹90-100 trillion, up 60 per cent from ₹59 trillion over FY21 and FY25. This time, the private sector is expected to dominate the capex on the back of favourable amendments by the government on development models. During FY21-25, central and state capex formed 90 per cent of the overall infrastructure capex.
Four key sectors — roads, railways, power, and irrigation — account for 75-80 per cent of the country’s total infrastructure capex. Over the past few financial years, roads and railways have been the primary drivers of capex, collectively accounting for 45-50 per cent of the total capex, indicating significant focus on transportation-related projects.
The Railways have a robust capital allocation of ₹2.7 trillion for this financial year. With new corridors, dedicated freight corridors and station modernisation, the total expected opportunity is expected to be ₹13.5-14 trillion over the next 5-7 financial years.
The power sector, which accounted for 20-22 per cent of the outlay in the past, is expected to gain momentum, with its share projected to increase to 26 per cent this fiscal, suggesting a growing emphasis on renewable energy (RE) infrastructure.
Power capex is expected to be driven by RE installed base (solar, wind, hydro, other RE, storage) growing at 20 per cent compound annual growth rate (CAGR) between fiscals 2025-2028, coupled with transmission line and substation construction growing at 6 per cent and 14 per cent CAGR, respectively, based on the National Electricity Plan.
On the other hand, investments in thermal power generation are expected to double over the three fiscals through 2028, because of renewed focus on meeting base load power requirements. Notably, the private sector is expected to account for nearly a third of the investments.
Irrigation capex is expected to increase 8 per cent in FY26 on a high base, driven by a greater focus on completion of major irrigation projects by key states. As of 2025, the top seven states accounted for 65-70 per cent of the total irrigation investment, and their continued investments will be important for expanding irrigation coverage. Additionally, between FY25-27, states such as Telangana, Maharashtra, and Gujarat are expected to ramp up their spending on irrigation significantly compared with the previous three years. Odisha, which has recently started investing more in irrigation, is likely to join the top seven states in terms of spending.
Other infrastructure segments will also see healthy growth, although their share will be lower. The capex momentum in Metro projects is expected to continue, supported by rising urbanisation, while water supply and sanitation projects will be driven by government schemes such as Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Swachh Bharat, Clean Ganga, and Jal Jeevan Mission. Sustained increase in infrastructure capex will translate into healthy revenue growth of 9-11 per cent for diversified engineering, procurement and construction (EPC) companies this financial year.
This growth will be led by two primary drivers. First, the order books of EPC companies remain healthy, with an order book-to-revenue ratio of 3.7 times as of March 2025. While the slowdown in awarding of road contracts has led to the share of roads and railways in the overall order book declining to 30 per cent as of March 2025, from 33 per cent a year ago, it has been mitigated by other sectors. Notably, the share of power transmission and distribution projects increased to 20 per cent from 13 per cent a year ago. The share of water and sanitation projects has remained steady at 27 per cent.
Second, companies also received sizable overseas projects in the recent past, with their share in the order book rising to 27 per cent as of March 2025 from around 23 per cent a year ago. These projects typically have shorter timelines, which in turn helps maintain the pace of revenue growth for companies.
To manage risks associated with such projects, companies are prioritising projects with strong counterparties or those backed by reputed multilateral funding agencies.
In addition to healthy revenue growth, stable commodity prices and rupee depreciation will lead to the operating margin rising 50 basis points to reach 9.5 per cent this financial year.
The credit profiles of EPC companies are expected to remain stable on the back of steady operating performance and comfortable balance sheets, with total outside liabilities to tangible net worth (TOLTNW) and interest coverage ratios projected at approximately 1.5 times and 5.0 times, respectively, for this financial year, marginally better than the previous year.
Balance sheets are expected to remain strong, buoyed by monetisation of assets by EPC players. These companies typically hold assets in sectors such as roads and power, and the steady performance of these assets in the recent past has translated into strong balance sheets.
Continued significant investments from the government and increasing private participation remain the key to the road ahead for infrastructure.
