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Informist, Thursday, Apr. 2, 2026

 

By Priyasmita Dutta

 

NEW DELHI – The finance ministry has communicated to the states the modalities for releasing 87.5% of the INR-2-trillion 50-year interest-free loan to them for capital expenditure in 2026-27 (Apr-Mar), a senior official said Thursday. In a letter Friday, the Centre detailed the criteria for disbursing loans worth INR 1.75 trillion and the norms for the remaining portion of the loan will be issued separately in due course, the official told Informist.

 

The scheme to provide special assistance to states for capital investment has multiple parts, with the majority of it being untied or simply based on the 16th Finance Commission's recommendation for states' share in central taxes, while some parts are conditional on the fulfilment of reforms and infrastructure development. Since FY25, the Centre has been cutting down the share of the untied portion of loans, and for FY27, this has been brought down to 37.5% from 42% in FY25 and 40% in FY26.

 

Funds under the untied portion of the scheme will be disbursed in two tranches. The first tranche of 66% will be given based on approval for capital projects submitted by states, while the remaining 34% will be provided only after 75% utilisation of the loans given in the first instalment. Of the INR 750 billion earmarked for the scheme, INR 670 billion will be disbursed to states, and INR 30 billion will be given to Union Territories. "The remaining INR 50 billion is earmarked for the release of balance funds for approved projects, including construction of unity malls, police housing, libraries for children and adolescents, digital infrastructure, tourist centres, and hostels for working women," the official said.

 

First launched in the Budget for FY22, the scheme for special assistance to states to carry out capital investment is in line with the Narendra Modi government's thrust on capital expenditure to drive economic growth. The Modi government has increased capital expenditure by over six times since FY15. This INR 2-trillion allocation to states as loans is part of the government's total capital expenditure target of INR 12.21 trillion for FY27, up 11.5% from the revised estimate of INR 10.96 trillion for FY26.

 

Within the tied or conditional part of the loan, the Centre has allocated INR 250 billion towards incentivising states to achieve targets for capital expenditure. Half of the INR 250 billion will be disbursed on achieving more than 10% growth in capital expenditure during FY26 over FY25, and the remaining will be disbursed on achieving 10% growth in capital expenditure in the first six months of FY27 over the corresponding period of FY26. "The incentive amounts approved under this part may be utilised by the state government or Union Territories for infrastructure projects in any sector," according to the letter seen by Informist.

 

For the first time, the Centre has allocated INR 250 billion for the special development of hilly states, citing constraints on their financial conditions and the unique demographical challenges. "Hill states typically exhibit weaker fiscal indicators, including high Debt-to-GSDP (gross state domestic product) ratios, relatively low Own Tax Revenue base, and a higher dependence on Central transfers," the letter said. "To accelerate the development of Hill states, there is a need for enhanced investment in capital expenditure, along with financial support to address committed liabilities."

 

According to the norms, the Centre has allocated INR 130 billion to accelerate the development of digital public infrastructure for agriculture--AgriStack--by states and Union Territories. This part has various sub-criteria for disbursement, including using AgriStack for fertiliser distribution and procurement under the Minimum Support Price, the letter said. 

 

Focussing on core infrastructure development, the Centre allocated INR 100 billion for funding the states' or Union Territories' share of central infrastructure projects, including railway projects, metro rail projects, highway projects, power projects, and airports, as well as infrastructure-oriented Centrally Sponsored Schemes such as Jal Jeevan Mission.

 

The other criteria for the tied portion of the scheme include undertaking mining sector reforms, efficiency in financial management, strengthening public finance infrastructure, and implementation of the Right of Way Rules, 2024, which is an enabler for the expansion of telecommunication networks across the country. The Centre allocated INR 50 billion for each of the first two components and INR 40 billion for each of the latter two.

 

The Centre also tied a portion of the 50-year interest-free loans to livestock sector reforms, compressed bio gas sector reforms, and fiscal discipline and fiscal consolidation. The allocation for each component is to the tune of INR 30 billion. 

 

This is the first time the Centre has introduced a criterion that addresses the issue of fiscal discipline of states, a long-standing pain point for the Centre. "The objective of this component is to encourage states to maintain fiscal discipline, promote sound debt management, adopt prudent borrowing practices, strengthen fiscal risk management, and enhance transparency in fiscal reporting," the official said. The INR 30 billion earmarked under this part will be made available to states on a first-come, first-served basis.

 

Minister of State for Finance Pankaj Chaudhary had said on Mar. 23 that the Centre had released INR 1.50 trillion under the scheme till then for FY26, while sanctioning loans worth INR 1.55 trillion. The disbursed amount is higher than the government's revised estimate of INR 1.44 trillion for the scheme as detailed by the Budget for FY27 on Feb. 1.  End

 

Edited by Ashish Shirke

 

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