Central loans from the pandemic era are about to get even bigger

States account for 20–25% of the overall infrastructure spending. (Photo: Mint)
States account for 20–25% of the overall infrastructure spending. (Photo: Mint)


  • The full-year budget for FY25, expected in July, is expected to dial up the allocation

New Delhi: The Union government plans to significantly scale up interest-free loans given to states, two people familiar with the matter said, leveraging a pandemic-era fix to nudge states towards reforms and capital expenditure.

The full-year budget for FY25, expected in July, is expected to dial up the allocation, the people cited above said on condition of anonymity. The additional amount will give states more arsenal to drive growth and reforms, the people said.

"The upcoming full-year budget could see some revision in certain allocations made in February, driven by the higher-than-anticipated RBI dividend payout, and other factors. The Centre's interest-free loans scheme for states could see higher allocations," one of the two people cited above said.

Also read: Centre links interest-free capex loans to states’ reform rollout

In FY21, the Centre launched the Special Assistance to States for Capital Investment to help states battling pandemic waves, providing an interest-free loan with a tenure of 50 years. Allocations to the scheme have seen a rise in the past few years, from 12,000 crore in FY21 to 1.3 trillion in FY24 under budget estimates and 1.05 trillion under revised estimates.

In FY24, the budgeted allocation to the scheme had 27,000 crore linked to specific reforms by states, which was increased to 75,000 crore in FY25, on the back of a total outlay of 1.3 trillion.

To avail of these loans, states must meet several conditions, including reforms in the housing sector, 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.

Also read: Why is the govt putting conditions on interest-free loans to states?

Of the 1.3 trillion, about 75,000 crore, or 58%, will be linked to outcomes and reforms carried out by the states, and the remaining 55,000 crore will also come with “simple conditions", Union finance secretary T.V. Somanathan had earlier told Mint.

"The portion of the interest-free loans disbursed to states under the condition of implementation of certain milestones is likely to be increased in the upcoming budget as the Centre wants to nudge the states to carry out reforms," the second person said. "The overall allocations to the scheme could see a 20-25% hike from the vote-on-account budget," the person added.

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

States account for 20–25% of the overall infrastructure spending, a key focus area for the government, and the easy loans have helped states stimulatecapital spending and catalyze the economy after the pandemic.

"The interest-free capex loans to states is an ingenious scheme to fund targeted investments across infrastructural segments. The strict sanction norms help with efficient capital deployment. Augmenting the outlay for this scheme with additional RBI dividend this year can be a prudent way to monetize states and support their growth," said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.

Also read: States may not borrow as much as they wanted. But that may not be a problem.

"In last two years, there has been a sharp rise in disbursements thorough this window, compared to the early years, suggesting the rising preparedness of Indian states to deploy additional fund streams to fill infrastructural gaps across housing, roads and various elements of the Gati Shakti plan," he added.

Last week, the RBI approved a record dividend of 2.11 trillion for the central government for FY24, 141% higher than the year before. The latest dividend payout from the RBI will be instrumental in compensating for any slippages in tax revenue and increased public spending in FY25.

The government is likely to signal its commitment to lay a solid foundation for medium-term growth through continued infrastructure expansion in the full-year budget, D.K. Srivastava, chief policy advisor at EY India told Mint last week.

Also read: Budget 2024: 75,000 cr provisioned for milestone-linked reforms in states

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