Centre Eases Capex Loan Norms to Boost State Spending in FY25

Overview
The Center has loosened a number of regulations pertaining to the issuance of interest-free capital expenditure loans to state governments in order to guarantee that the entire Rs 1.5 lakh crore allocated for 2024–2025 is utilized throughout the year and to prevent a reduction in public capital expenditures.

The action is intended to reduce the probable shortfall between the actual budgetary capital expenditure and the Rs 11.1 lakh crore budgeted level. To put this in perspective, just about Rs. 5.13 lakh crore or about 12.3% or less than the previous year had been spent from capex budget by November, 2024. The government hopes to streamline the procedure for states and increase capital spending in the latter quarter of FY25 by transforming tied savings into untied loans.

To aid long-term asset creation and investments, capex loans which are provided by the government as interest-free advances for 50 years are intended. Of the entire amount allotted for FY25, Rs 95,000 crore is linked to particular reforms like infrastructure development, land reform, and industrial growth, while Rs 55,000 crore is currently untied and available to states for initiatives of their choosing. However, with less than Rs 1 lakh crore sanctioned so far this year, disbursements have delayed. In the first half of FY25, the Center approved Rs 70,000 crore and released Rs 40,000 crore, falling well short of the yearly target of Rs. 1.15 lakh crore.

Delays in disbursement of loans
Delays in states achieving reform-linked standards, which were released in August rather than February, have resulted in slower payments of the tied share of the capital expenditure loans. States’ capacity to enact the necessary reforms was further hampered by the fact that this postponement fell during both the general and state elections. States have shown the greatest interest in tourism projects out of the 12 conditional allocations under the linked component. Urban land reforms, car scrappage, and working women’s hostels are further areas of concentration. Rs 25,000 crore of the Rs 95,000 crore in tied loans are contingent on states attaining a minimum of 10% growth in capital expenditures. The remaining portion will be released depending on growth in April–September of FY25, with the other half being determined by performance in FY24. After certain states such as Andhra Predesh, Kerala, and Punjab failed to meet the criteria, in FY24, the centre’s allocation of Rs. 1.30 lakh crore was reduced to Rs. 1.05 lakh crore.

Amendments in norms
States that experienced severe natural disasters in 2024–2025—as confirmed by the home ministry panel—will get an additional allocation of up to 50% of the funds already allotted under the untied category, according the most recent change to the regulations. The impacted states would have to utilize this sum for projects aimed at preventing future disasters as well as for the rehabilitation of infrastructure, ideally in areas devastated by the disaster. Additionally, on a first-come, first-served basis, states that have used the first installment under the untied category and have used the second installment will receive an additional allocation of up to 100% of the original allocation to the Hill and North East States and 50% of the original allocation for the other states.

Compared to the earlier allocation of Rs 55,000 crore for FY25, these two adjustments will significantly boost the total flow of untied loans to states. Further, the Center has loosened a number of requirements under the loan’s “tied” component, including as the one pertaining to the states’ “own capex” accomplishment.

According to the first standards, the Center gave states Rs 25,000 crore as a capex performance incentive: 50% if they achieved over 10% on-year growth in FY24, and the remaining 50% if they achieved over 10% growth in the first half of FY25. According to the 15th Finance Commission’s decision, funds would be distributed across the states in proportion to their share of central taxes and charges. The Center also modified incentives for the implementation of the SNA SPARSH Model for Just-in-Time disbursement of money under nationally sponsored schemes, as well as criteria pertaining to infrastructure projects in both urban and rural areas. These would guarantee that states will make full use of loans designated for these uses.

Further, the transfer of funds under the scheme has been extremely rapid this year, particularly in the last two to three months. Since several states were unable to comply with the severe conditions imposed by the Center, the Center was able to disburse Rs 1,05,551 crore, or 70% of the expenditure of Rs 1.5 lakh crore, during the previous fiscal year. Between April and November of the current fiscal year, the Center’s capital expenditures fell by more than 12%.
It is said that government’s capex would fall short of the FY25 target of Rs. 11.11 lakh crore by Rs. 1-1.5 lakh crore.

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