Centre links part of state capex loans to new reforms in land, and digitization

New Delhi: The Centre has drawn up a new set of reform-linked conditions for states to access a portion of the ₹1.5 trillion interest-free capex loan for FY26, two people aware of the matter said, with a focus on digitization, governance, land reforms and urban planning.

“States will now be required to implement targeted reforms in key areas including digital public infrastructure (DPI) for agriculture, improvements in financial management systems, better urban planning, and streamlined land-related processes," said the first person mentioned above, speaking under the condition of anonymity.

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Of the  ₹1.5 trillion earmarked for FY26, around 60% will be unconditional or linked to infrastructure spending, while the remaining 40% will be tied to reforms that states and Union Territories must undertake to access the funds, the person mentioned above added.

Interest-free loans with a tenure of 50 years have played a vital role in stimulating capital spending by states and catalyzing the economy since the pandemic.

As things stand, states account for 20–25% of India’s total infrastructure spending, a critical priority for the government.

Focus on digital transformation

“This year’s reform agenda puts a sharp focus on accelerating digital transformation in agriculture through federated farmer databases, digitized land records, and digital crop surveys,” the second person mentioned above said, requesting anonymity.

Meanwhile, the central government has made Aadhaar-based Direct benefit transfer (DBT) integration with the Reserve Bank of India (RBI) and National Payments Corporation of India (NPCI) mandatory across all state-run schemes.

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"Land and regulatory reforms remain a key thrust as states are expected to enable flexible mixed-use development, digitize land use change approvals, rationalize industrial road width norms, and amend building rules to minimize land loss. These are critical steps to boost manufacturing, agriculture, and ease of doing business," the second person mentioned above said.

“The goal is to ensure that capital investment is not just about creating assets, but about improving the way states govern and deliver,” the person added.

Key role in state capex

Launched in FY21, the Centre’s 50-year interest-free capex loan scheme has played a key role in driving state-led capital spending and reviving the post-pandemic economy.

For FY26, ₹1.5 trillion has been earmarked to accelerate infrastructure development and support state-level projects. Of this, about 60% will be either unconditional or tied to infrastructure spending, while the remaining 40% will be linked to specific reforms.

The conditions states had to meet in the past two years to avail of the central loans included reforms in the housing sector, providing incentives for scrapping old government vehicles and ambulances, reforms in urban planning and urban finance, increasing housing stock for police personnel, and setting up libraries with digital infrastructure at panchayat and ward levels for children and young adults.

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Finance minister Nirmala Sitharaman ramped up allocations to ₹1.5 trillion each for FY25 and FY26—up from ₹1.10 trillion in FY24. However, the FY25 outlay was later revised to ₹1.25 trillion due to slower-than-expected spending in the first half of the fiscal, which was largely due to elections.

A spokesperson of the Ministry of Finance didn't respond to emailed queries.