Centre weighs easing conditions for interest-free capex loans to states

The Union government is planning to ease some conditions for giving out these loans under its ‘Special Assistance for Capital Investment’ scheme, according to two people aware of the development.

The development comes after the country’s GDP (gross domestic product) growth slowed to 5.4% in the September quarter, its slowest in nearly two years, due to slower government spending and falling consumption, especially in urban areas, among other factors.

“The idea is to fast-track the disbursement of interest-free capex loans during the last quarter of the fiscal to encourage states to spend more on capital expenditure," the first person mentioned above said.

The second person said that the loans are expected to boost state capex spending, particularly on infrastructure projects, to support overall growth. Both persons spoke on condition of anonymity.

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The Centre plans to ease certain conditions regarding reforms to avail these loans. For instance, states were previously required to implement reforms in areas such as incentives for scrapping old government vehicles and ambulances, improving urban planning and finance, building housing for police personnel, and establishing libraries with digital infrastructure at panchayat and ward levels for children and young adults.

“Since a portion of the outgo is linked to reforms being carried out by states, the Centre is considering relaxing some of the norms so states can seek more funds without any conditions," the second person added.

To be sure, of the total allocated amount under the scheme for FY25, about ₹88,000 crore, or 58%, is linked to outcomes and reforms by states.

Then, loans not linked to specific reforms were to be given for projects that are set to be completed within the current fiscal year (FY25). “Some of these conditions could be relaxed to expedite public capex spending," the first person mentioned above said.

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A spokesperson of the finance ministry didn't respond to emailed queries.

Slow disbursement so far

So far this fiscal, disbursement of these long-term loans to states has been slow. In the first eight months of FY25, the Centre has released only about a third of the scheme’s outlay to the states— ₹50,571.42 crore of the ₹1.5 trillion allocated in the Union budget.

The first person cited earlier said that this is now expected to be expedited in the fourth quarter. “The endeavour will be to utilise the entire amount allocated under the Special Assistance for Capital Investment scheme. However, there's a possibility that the entire allocated amount under the scheme may not be utilized," the first person said.

Experts said the Centre needs to aggressively push for disbursing capex loans to states to achieve the annual budgeted target.

“We are hoping to see significant disbursement during Q4, FY25 as the first few quarters saw a delay due to elections," said Bhanumurthy N.R., director at Madras School of Economics, adding that some project-wise proposals for capex loans from states were delayed as well.

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"Ultimately, the plan is to address the supply side issues," Bhanumurthy said. “However, going ahead, it will be interesting to see the absorptive capacity of the states and the Centre, as there is bound to be a saturation (for capital expenditure) at some point."

According to a recent report by CareEdge Ratings, formerly Care Ratings, state governments of as many as 20 major states, representing about 93% of India’s GDP, have reported revenue expenditure growth exceeding budgeted estimates during H1, FY25, while capital expenditure remains sluggish.

“...the capital expenditure of our sample states struggled in H1 FY25. After contracting by 20.5% (y-o-y) in Q1 FY25, the decline in capex narrowed to 2.2% (y-o-y) in Q2. Eleven out of the top 20 states experienced a contraction in capex growth in H1," it added.

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Introduced in 2020-21, the interest-free loan with a tenure of 50 years has played a vital role in stimulating capital spending by states and catalysing the overall economy in the aftermath of the pandemic.

In 2023-24, 26 of the 28 states opted for the loan scheme, with Punjab and Kerala being the exceptions.