Government set to introduce road index to check cost hikes
The Government of India is planning to come up with a new road sector index in order to fair evaluation of cost escalation faced by the road developers.
What is an index?
Index, is basically, a statistical measure of change in a particular market or a portion of it. Every index has different calculation methodology. It is generally expressed in terms of a change from a base value, for which the difference in percentage is taken into account than the actual values.
For instance, in case of the residential housing segment, the National Housing Bank (NHB) tracks the movement of prices in residential real estate market of India through ‘Residex’. The values recorded in 2007 are considered as base value for each city. City-wise quarterly housing prices are noted and compared with the base values of that particular city and housing price index is calculated.
How will the road index be drawn?
Official sources explained that the index would mull over construction materials including cement, steel, tar, bitumen and mud, while their weights would vary on the basis of importance and usage of the materials in the construction of roads.
What is the use of road index?
The road index is proposed to ensure a fair assessment of increase in road construction costs. Since many years, the project developers often claim that they had to shed additional costs for road developments than what was planned at the early stages. Many unforeseen costs and rise in costs of construction material add more burden on the developers. Keeping this in mind, the Government has planned to come up with a index, which would make it easier to understand the project cost-related issues faced by developers and find appropriate solution.
According to the ministry of road transport and highways, the headline inflation measured through the wholesale price index (WPI) which includes a huge basket of items with different weights fails to correctly assess the cost escalation in the road sector. The road ministry states that it is essential to have an idea of how the inflation would affect construction of roads, that too when the developers are supposed to quote in the estimated cost of project construction at the time of bidding for projects.
The introduction of the new road sector index is likely to curb the issue of lower cost estimations of total project by the road ministry and the National Highway Authority of India (NHAI) against what the developers have quoted.
Who will set the index?
Sources revealed that the ministry has directed the NHAI to recommend a method for index formulation and the weights of each item in the basket, after which the WPI linkage (to estimate cost of road construction) can be removed. And once the index is selected, the road ministry will pass it for CCEA clearance following which it will be adopted by the government.
What experts say?
Market experts are of the opinion that the Centre’s move will not only help in a fair estimation of projects’ costs and inflationary impact, but it would also be of great help in judging the claims of the developers and contractors, who often claim additional cost citing the reason of cost inflation while submitting their bills. Many cases are still lying pending since many developers have been showing huge claims of additional funds that they allege to have spent on projects they have developed. In several cases, private developers try to take advantage of the situation as there is no proper system present to control such irregularities in the system.
