To boost public spending, the central government has introduced measures to ensure that the entire allocation of Rs 1.5 lakh crore for interest-free capital expenditure (capex) loans to states is fully utilized in the financial year 2024-25. This step is crucial as it aims to offset a potential shortfall in the overall budgetary capital expenditure, projected at Rs 11.1 lakh crore for the year.
Addressing Decline in Capex Spending
By the end of November 2024, the Centre had spent Rs 5.13 lakh crore from its capex budget, marking a 12.3% decline compared to the same period the previous year. To counter this, the government is accelerating the release of capex loans to states, with officials confident of achieving the 100% target for FY25.
Already, around Rs 90,000 crore, or two-thirds of the annual outlay, has been disbursed. This marks a notable improvement over the previous fiscal year, when only Rs 61,500 crore was released in the first three quarters (April-December FY24). The faster pace this year is especially significant given the delays caused by general elections and the full budget being announced in July 2024.
Loans Linked to Reforms and Flexibility in Criteria
Of the Rs 1.5 lakh crore earmarked for FY25, Rs 95,000 crore is tied to reforms and criteria such as:
– Boosting states’ capex.
– Stimulating industrial growth.
– Supporting major infrastructure projects.
– Implementing urban and rural land reforms.
The remaining Rs 55,000 crore is untied, meaning states can use it for projects of their choice.
However, recent amendments have introduced additional flexibility:
1. Support for States Affected by Natural Disasters:
States severely impacted by natural disasters in FY25, as confirmed by a central panel, will receive up to 50% additional allocation under the untied category. This extra funding must be used for infrastructure reconstruction and disaster mitigation projects in affected districts.
2. Incentives for Effective Utilisation:
States that have utilised their first untied loan instalment and availed the second instalment can access further allocations. North Eastern and Hill states can receive up to 100% additional funding, while other states are eligible for up to 50% extra, based on a first-come, first-serve basis.
These changes are expected to increase the flow of untied loans to states, beyond the initial allocation of Rs 55,000 crore.
Focus on Urban Planning Reforms
The government has introduced a new provision under the tied loans category, earmarking Rs 5,000 crore for states undertaking or implementing urban planning reforms in FY25. This addition underscores the Centre’s focus on enhancing urban infrastructure and governance.
Adjusted Incentive Criteria for States’ Capex Growth
Initially, Rs 25,000 crore was allocated as an incentive for states achieving over 10% YoY growth in capex for FY24 and in the first half of FY25. Now, the Centre has broadened the eligibility criteria:
– States achieving over 10% growth in capex during the second and third quarters of FY25 (July-December 2024) or the first three quarters of FY25 compared to the same period in FY24 will also qualify for incentives.
This adjustment aims to motivate more states to accelerate their spending and meet the targets.
Simplifying Conditions for Loan Utilisation
The Centre has relaxed conditions for tied loans related to urban and rural infrastructure projects. Incentives for adopting the SNA SPARSH model—a system ensuring just-in-time release of funds under centrally sponsored schemes—have also been simplified to help states access and utilise loans more efficiently.
Encouraging Faster Fund Release
State officials have noted the improved pace of fund disbursement in FY25, especially over the last two to three months. In FY24, the Centre released only 70% (Rs 1.05 lakh crore) of the Rs 1.5 lakh crore allocated, as many states struggled to meet the stringent conditions. This year’s amendments aim to avoid a repeat, ensuring that states can fully utilise their allocations.
Potential Challenges Ahead
Despite the increased efforts, analysts estimate that the Centre’s capex could fall short of the FY25 target by Rs 1-1.5 lakh crore. However, the proactive steps to ease loan conditions and incentivise state spending are expected to mitigate some of these challenges and support public infrastructure development.
These measures reflect the government’s commitment to sustaining economic growth through robust public investment, even amid fiscal constraints.