Highways and Economics: The Math Behind Development

Highways are the backbone of our economy. They connect markets, create jobs, boost trade, and uplift communities. But building them requires massive financial investment from taxpayers, private investors, or global lenders such as the ADB or the World Bank. A careful analysis of the expenditure behind these projects is necessary because every highway must justify its investment cost. In other words, economic analysis of highways must prove viability and feasibility.

Economic analysis is a mathematical tool to tabulate and see whether benefits such as time saved, fewer crashes, economic growth, lower costs of construction, maintenance, and environmental impacts outweigh the capital outlay.

(This piece is part of our series expanding on Highways Are Built Twice: First on Spreadsheets, Then on Ground, which looks into four key considerations for highway planning. You may want to read that first. This write up focuses on the first consideration we take up in the mini-series on highways.)

Economic analysis has evolved significantly since the early 1980s, aligning with MoRTH’s rules. Revision in Codal provisions, and the recent circulars from MoRTH and NHAI (outlined below) have made it a stronger foundation for the development of the road network and economic corridors in India.

Why Economic Analysis Matters for India’s Highways?

| Every investment must prove its value.

Massive development schemes such as Bharatmala Pariyojana and PMGSY (Pradhan Mantri Gram Sadak Yojana), start out as visions first. The very first hurdle they must cross to turn into reality is justifying that they are worth pursuing and implementing. This is done through economic analysis, which helps decide if a project is viable by analysing data of past investment and calculating the future benefits. But what does this economic analysis consist in? Some of the key metrics professionals look into are:

Benefit-Cost Ratio (BCR)

BCR shows how much value a project will generate for every unit of cost. A ratio of more than 1 indicates that the project is economically feasible and makes sense. It is a key indicator used to prioritize and select infrastructure investments.

Net Present Value (NPV)

NPV measures whether a highway project’s benefits outweigh its costs when both are expressed in terms of today’s money. Since a rupee today is worth more than a rupee tomorrow (due to inflation, opportunity cost, and risk), future values are discounted to the present. A positive NPV means the project creates net value; a negative NPV means costs exceed benefits.

Economic Internal Rate of Return (EIRR)

EIRR checks whether the benefits of a road project are worth the money spent. It represents the discount rate at which the present value of a project’s economic benefits equals its costs. An EIRR of 12% or higher is generally considered as the benchmark for economic viability in infrastructure projects. It reflects the overall value the project delivers to society in terms of time savings, reduced operating costs, and safety improvements.

In India, MoRTH and NHAI mandate EIRR for Detailed Project Reports (DPRs) to ensure investments deliver value. Old spreadsheet methods have given way to modern software simulations that handle big data on traffic, costs, and benefits, factoring in India’s unique challenges like mixed traffic, monsoons, and rapid urbanization.

The Road So Far

| From spreadsheets to simulations, methods have kept pace with ambition

In the 1980s, highway economics in India focused on the basics, including fuel savings, less vehicle wear, time savings, fewer accidents, and lower maintenance. Calculations, guided by IRC SP 30-1979 and CRRI’s 1982 VOC studies, were done manually with a 12% IRR target. But without modern tools, wider impacts like regional growth were largely overlooked.

By the 2000s, with mega-projects such as the Golden Quadrilateral, the scope expanded. Analysis began factoring in multimodal transport, environmental effects, and PPPs. Benefits now include trade, tourism, jobs, and emission reductions, supported by tools like HDM-4 for better forecasting.

Today, highway economics is far more advanced. Life-cycle costing, sensitivity tests, and AI-driven models (aligned with updated IRC manuals) allow detailed comparisons of “with-project” and “without-project” cases. Factors like climate resilience, rural vs. urban impacts, and freight vs. passenger benefits ensure outcomes are not only efficient but also sustainable.

Key Tools and Guidelines Shaping Highway Economics

Modern software tools help engineers run analyses faster, more accurately, and see results clearly. Among them, HDM‑4 is an important tool for planning and evaluating major highways.

1. HDM-4: The necessity of highway economists

Developed by the World Bank, HDM-4 has become an essential tool for National Highways, state roads, and PPP projects economic analysis. MoRTH has mandated it for DPRs under IRC SP 30:2019.

The process starts with collecting all the essentials about a road: its length, pavement type, surface roughness/IRI, traffic data (AADT, vehicle mix including two-wheelers), costs (fuel, labor, construction), environmental factors (like monsoons and emissions), and maintenance plans, using CRRI 2001 with IRC updates, VOC study for India-based values.

With this information, a life-cycle cost-benefit analysis is carried out, where road deterioration is predicted (using IRI), and costs like vehicle operation (fuel, tires, repairs), value of time (separated for business/leisure and rural/urban), accident reduction (valued using standard life values), and emissions (CO₂, Nox, Particulate Matter (PM)) are calculated. The process simulates the lifecycle of 20 as standard (30 years only in special projects), applies discounting of 12% (India), 10–12% (international), and compares with-project and without-project cases where the output is expressed in terms of NPV, BCR, and EIRR. Sensitivity checks like traffic growth or fuel price rise, along with graphical reports, are added to test the results better.

For large projects, the model is fine-tuned, adjusting for high motorcycle traffic and monsoon damage. The analysis is meant to show whether the savings in time and vehicle costs are enough to justify the investment, offering decision-makers a clear picture of the project’s value.

2. RED: Simplified tool for Rural Roads

The Roads Economic Decision Model (RED), developed by the World Bank, is especially suited for evaluating low-volume rural roads such as those under PMGSY. It begins with basic inputs such as road length, surface type, low-traffic volumes (including bicycles and carts), costs, and social factors like access to markets.

The core modelling then runs a simplified cost-benefit analysis, taking into account vehicle operating costs, time savings (based on local wage levels), social benefits such as access to schools and healthcare, and future maintenance requirements. Simulations typically cover 10–20 years using lower discount rates of 8–10%, producing outputs like NPV, BCR, and EIRR.

RED also compares options like paved versus gravel roads and includes qualitative assessments of social impact. In India, State PWDs frequently use it for village road projects to highlight regional development benefits, which makes it a preferred choice for funders like the Asian Development Bank.

3. Artificial Intelligence: The next big thing

AI-Powered Tools are emerging as the next frontier in road economic analysis already being piloted by CRRI and IITs. They draw on massive datasets such as traffic GPS, crash statistics, and weather records. Core modelling uses Machine Learning (like Random Forests) to estimate VOC and costs, Artificial Neural Networks to capture complex trends such as traffic growth, and Deep Learning to process sensor data for environmental impacts.

Often working alongside HDM-4, these tools run lifecycle forecasts and generate NPV, BCR, and EIRR, and add advanced sensitivity testing. Features such as real-time data integration (e.g., EV adoption impacts) and interactive dashboards make decision-making dynamic. In India, these tools have been piloted on the Delhi–Mumbai Expressway to assess traffic spikes and climate risks.

4. Alignment with MoRTH Guidelines (IRC SP 30:2019)

IRC SP 30:2019 serves as the key guideline for highway economic evaluation in India. It ensures that evaluation tools comprehensively address critical aspects and environmental benefits linked to emission reductions in support of net-zero goals. It also emphasizes regional growth impacts, including trade, jobs, and tourism, alongside climate resilience measures such as monsoon-proofing. Sensitivity analysis is mandated to account for uncertainties in forecasts.

5. Latest MoRTH and NHAI directives

NHAI and MoRTH have recently issued circulars (outlined below) aimed at reshaping highway economics. They focus on making economic analysis more risk free and improving the value-for-money factor.

• Advance Planning Sanction (October 28, 2024): NHAI introduced advance approvals for
  feasibility studies of projects pending Standing Finance Committee (SFC) clearance. This measure speeds up project pipelines and supports approx. ₹3.5 lakh crore investments planned for 2025–26.
• SOP for DPR Cell (October 25, 2024): A new standard operating procedure has been issued for DPR Cells, mandating standardized economic checks such as VOC and VoT. This ensures
  consistency in appraisal and reduces risks from uneven evaluations.
• PATSC Revisions (September 27, 2024): Changes were made to Project Appraisal and Technical Scrutiny Committees (PATSC) to strengthen review mechanisms. This enables unbiased project evaluations with preference given to green and sustainable projects.
• Tunnel Cost SOP (July 16, 2024): NHAI rolled out specific guidelines for analysing tunnel costs in project appraisals. This helps in addressing uncertainties and provides clearer risk assessment for investments in hilly terrain.
• Policy No. 8.4.50/2025, revising the delegation of powers for processing proposals related to
  refinancing and restructuring in Hybrid Annuity Model (HAM) projects (June 21, 2025):
  Introduced to streamline approvals for new projects, this directive enables faster decision-making, facilitating the rollout of 23 highway projects by March 2025.
• Greening SOPs (October 21, 2024): NHAI issued standard procedures for integrating
  environmental considerations into project economics. This emphasis on sustainability enhances access to ESG-linked domestic and international funding.

Overall, these circulars make sure only strong projects with high Benefit-Cost Ratios move forward, so money isn’t wasted on low-return works. Clear and transparent rules help bring in more private players through PPPs, while the push for greener practices makes it easier to get international funds that care about sustainability. At the same time, faster approvals and standard checks cut down delays, helping India meet its big highway targets on time.