Centre likely to miss ₹1.5 trillion capex loan target for states in FY25

The actual disbursement could even remain below ₹1 trillion, less than the 2023-24 outgo of ₹1.09 trillion and ₹1.5 trillion budgeted for the interest-free capital expenditure loan scheme in this year's budget, the people said on the condition of anonymity. 

During the first eight months of the fiscal, the Centre has released only ₹50,571.42 crore to states.

"While the capital expenditure at the state level is expected to be ramped up during the third and fourth quarters (FY25), the entire allocation is unlikely to be utilized," the first person said, adding that the utilization of funds in 2024-25 is likely to be below last fiscal's ₹1.09 trillion, due to slower spending during the first two quarters.

Also read | Centre releases ₹50,571 cr to states as capex loans during Apr-Nov: MoS finance

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

India’s public capex has largely been subdued in H1FY25, with the central and aggregate state capex contracting by 15.4% and 10.5% on-year, respectively, during the period, said a recent CareEdge Ratings report.

The Centre has achieved 37% of its budgeted capex target in H1FY25, while 20 major states at an aggregate level have completed only 28% of their budgeted target, the rating agency added.

For 2024-25, the Centre boosted its capex by raising the allocation on developing infrastructure projects to ₹11.11 trillion, building on increases in recent years to spur economic growth.

However, the department of economic affairs' secretary Ajay Seth recently said the Centre is expected to utilize about ₹10.55 trillion of the capex in the current fiscal, or about 95% of the allocations, due to undershooting, including a slowdown in spending due to general elections.

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With both expenditure and growth slowing down during the first two quarters due to the general elections, the Centre's interest-free loans will boost capex spending by states, especially on infrastructure projects, to aid overall growth, the second person said.

"One can expect the outgo under the Special Assistance for Capital Investment scheme to increase in Q3 and Q4 due to the emphasis of the central and state governments to fast track capex following a slowdown in the first two quarters," the second person said.

"However, a portion of the outgo is linked to reforms being carried out by states. So, states that have carried out the reforms can seek more funds under the scheme," the second person added.

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

In order to claim a portion of the interest-free loans, states were required to undertake certain reforms, including those in the housing sector, incentives for scrapping old government vehicles and ambulances, those in urban planning and urban finance, housing for police personnel, and setting up libraries with digital infrastructure at panchayat and ward levels for children and young adults.

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For loans not linked to specific reforms, one criterion that is followed is that they would be given for projects that are set to be completed within the fiscal year.

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 catalyzing 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 only states not to receive any funds under the scheme from the Centre.