State capex loans cross 56% of FY26 target by Jan 5; Centre aims for full utilisation

The recent announcement that the Centre has released over ₹83,000 crore to states under the 'Special Assistance Scheme for Capital Investment' by January 5, crossing 56% of the FY26 target, marks a significant development in India’s fiscal federalism and economic strategy. This initiative, providing interest-free loans for capital expenditure, is a critical component of the government's efforts to stimulate economic growth and build robust infrastructure across the nation.

**Background Context and What Happened:**

India, like many global economies, faced significant economic headwinds, particularly in the aftermath of the COVID-19 pandemic. Private sector investment often tends to be cautious during periods of uncertainty, making government spending, especially capital expenditure (capex), a vital engine for economic revival. Capital expenditure refers to money spent by the government on creating long-term assets like roads, bridges, ports, hospitals, and schools. These investments have a high multiplier effect, meaning every rupee spent generates more than one rupee of economic activity, creates jobs, boosts demand for raw materials, and enhances productivity. Recognizing this, the Central Government introduced the 'Special Assistance Scheme for Capital Investment' in the financial year 2020-21 (FY21) to support states in their capital spending efforts. The scheme offers 50-year interest-free loans to state governments for capital projects, providing a substantial incentive for them to undertake large-scale infrastructure development without burdening their immediate revenue finances or incurring interest costs. The current disbursement of over ₹83,000 crore by early January demonstrates the Centre's commitment and the states' increased uptake of these funds, indicating a strong push towards infrastructure development.

**Key Stakeholders Involved:**

1. **Central Government (Ministry of Finance):** The primary architect and financier of the scheme. It sets the terms, allocates funds in the Union Budget, and disburses the loans. Its objective is to drive national economic growth, ensure balanced regional development, and provide fiscal support to states. The scheme is a discretionary transfer, decided by the Union government, rather than a statutory transfer recommended by the Finance Commission.

2. **State Governments:** The beneficiaries and implementers. States receive these interest-free loans and are responsible for identifying, planning, and executing capital projects. This scheme is particularly attractive to states, as it alleviates their borrowing costs and offers a long repayment period, enabling them to invest in crucial infrastructure despite their often-strained fiscal positions.

3. **Indian Economy:** The ultimate beneficiary. Increased capital expenditure translates into job creation, enhanced productivity, improved logistics, and a more competitive economic environment. It also helps in crowding in private investment by creating better infrastructure.

**Why This Matters for India:**

This scheme is crucial for several reasons. Economically, it acts as a powerful counter-cyclical fiscal policy tool, injecting much-needed demand into the economy and stimulating growth. By enabling states to invest in infrastructure, it addresses critical development gaps, from rural roads to urban amenities, improving the quality of life for citizens. From a fiscal federalism perspective, it represents a significant instance of the Centre extending financial support to states beyond the recommendations of the Finance Commission. While it aids states, it also gives the Centre a degree of influence over the nature and pace of state-level capital projects, potentially aligning them with national development priorities. The long-term, interest-free nature of these loans makes them a more attractive and sustainable form of financial assistance compared to market borrowings, which come with interest obligations and shorter repayment tenures. This proactive approach helps states manage their debt better while investing for future growth.

**Historical Context and Constitutional Provisions:**

Historically, central assistance to states has evolved from the era of the Planning Commission, which oversaw plan and non-plan expenditures, to the current framework guided by the Finance Commission and various central sector/centrally sponsored schemes. The 'Special Assistance Scheme' falls under the ambit of discretionary grants and loans that the Union government can provide to states. Article 282 of the Indian Constitution empowers both the Union and State governments to make grants for any public purpose, even if it falls outside their respective legislative competence. This article provides the constitutional backing for such discretionary financial assistance. Furthermore, Article 293 deals with the borrowing powers of states, requiring them to obtain the consent of the Central Government for borrowing if they are indebted to the Centre. While these are interest-free loans, they still fall under the broader framework of inter-governmental financial relations. The recommendations of the 15th Finance Commission (for the period 2021-26) have also emphasized the importance of capital expenditure for economic growth and fiscal health, often linking grants to states' performance in specific areas or fiscal reforms.

**Future Implications:**

The continued success and full utilization of this scheme by the fiscal year-end could set a precedent for future Centre-state financial collaborations. It suggests a sustained focus by the Central government on leveraging public investment for economic revival and long-term growth. For states, it provides an opportunity to accelerate development projects, enhance their infrastructure backbone, and potentially attract private investment. However, effective utilization and timely execution of projects by states will be key. While the interest-free nature is beneficial, these are still loans that add to the states' overall debt, necessitating prudent fiscal management. The scheme could also strengthen cooperative federalism by fostering closer coordination between the Centre and states on development priorities, ensuring that resources are channeled effectively towards national growth objectives. It may also lead to a discussion on whether such special assistance should be institutionalized or remain a discretionary tool for economic exigencies.