Centre Considers Stricter Capex Loans to States Amid Freebies Focus Over Infra Spend

As per Moneycontrol reports, the Union government is reviewing the structure of its 50-year interest-free capital expenditure (capex) loan scheme to address concerns that several states are relying heavily on central assistance rather than deploying their own funds for infrastructure projects, as per the reports.

States’ Dependence on Central Loans

According to finance ministry officials, states such as Andhra Pradesh, Rajasthan, Bihar, Jharkhand, Madhya Pradesh, Himachal Pradesh, West Bengal, Uttarakhand, and several north-eastern states have utilised capex loans from the Centre more than their own resources over the last three years. The Centre is examining how to modify the scheme for states that are substituting their own capex efforts with central loans.

Scheme Background and Current Outlay

The capex loan scheme was introduced in 2020-21 to support infrastructure spending after the COVID-19 pandemic disrupted fiscal balances. For the current financial year, the Centre has allocated ₹1.5 lakh crore towards these interest-free loans. A portion of the funding is linked to reforms such as industrial growth initiatives, land reforms, and the timely completion of infrastructure projects.

Rising Debt-to-GDP Ratios

Reports suggest that officials have flagged concerns about the impact of continuous capex lending on the debt-to-GDP ratios of smaller states. While larger states may absorb additional debt, smaller states are more vulnerable. The Seven Sisters, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland, and Tripura have largely depended on the central capex loans for infrastructure spending.

A study by the National Council of Applied Economic Research in February projected that more states could cross the 40% debt-to-GDP threshold by 2027-28, with Punjab potentially exceeding 50%. The FRBM Act recommends a combined debt-to-GDP ratio of 60%, split as 40% for the Centre and 20% for states.

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Low Capex Spending by States

As per the reports, data shared by the government shows that between FY23 and FY25, Punjab, Puducherry, West Bengal, Arunachal Pradesh, Kerala, Jharkhand, Odisha, Andhra Pradesh, and Karnataka allocated less than 6% of their total expenditure to capex.

Conclusion

The Centre is evaluating changes to the capex loan scheme to encourage states to invest more of their own funds into infrastructure while managing rising debt levels.

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