Centre Provides Interest-Free Loan of Rs.15,000 Crore to States for Capital Projects

The Ministry of Finance decided to give up to Rs.15,000 crore as an interest-free 50-year loan to states for spending on capital projects on Friday. The Department of Expenditure issued new guidelines relating to the ‘Scheme of Financial Assistance to States for Capital Expenditure’ for 2021-22. 

The capital expenditure generates employment, especially for the unskilled and poor. It boosts the economy’s future productive capacity, has a high multiplier effect, and results in a higher economic growth rate. During the budget speech, the Finance Minister announced that the centre would take measures to nudge states to spend more on infrastructure. She stated that the centre would incentivise the disinvestment of the Public Sector Enterprises (PSE).

Thus, the government decided to launch the ‘Scheme for Special Assistance to States for Capital Expenditure’ last year, despite the adverse financial position of the Central Government. Under this scheme, the government gave financial assistance to the State Governments in a 50-year interest-free loan. 

Under this scheme, there was an allocation of up to Rs.12,000 crore for FY 2020-21. Subsequently, there was a release of a sum of Rs.11,830.29 crore to the states. The sum released under this scheme helped the states to sustain the state-level capital expenditure during the pandemic situation. 

The government decided to continue this scheme for FY 2021-22 because of its positive response and the requests made by the state governments. The ‘Scheme of Financial Assistance to States for Capital Expenditure’ for FY 2021-22 has three parts:

  • Part-I of this scheme is for the North-East and Hill States. There is an allocation of an amount of Rs.2,600 crore for this part under the scheme. Out of this, Himachal Pradesh, Uttarakhand and Assam will get Rs.400 crore each. The remaining states in this group will get Rs.200 crore each.
  • Part-II of the scheme is for all the other states that are not included in Part-I. There is an allocation of an amount of Rs.7,400 crore for this part under the scheme. States will share the amount in proportion to the share of central taxes according to the award of the 15th Finance Commission for FY 2021-22.
  • Part-III provides incentives to the states for disinvestment of the State Public Sector Enterprises (SPSE) and recycling or monetising infrastructure assets. There is an allocation of an amount of Rs.5,000 crore for this part under the scheme. The states will receive interest-free 50 years loans under this part that range from 33% to 100% of the sum realised by them through the listing, assets monetisation and disinvestment.

The monetisation of the assets will unlock their value, enable scarce public funds to be deployed to new projects, and eliminate their holding cost, thus speeding up implementing the National Infrastructure Pipeline.

The utilisation of the funds under this scheme will be for the states’ ongoing and new capital projects for their long term benefit. The states can also use the funds for settling pending bills in the ongoing capital projects. This scheme will surely help the State Governments to undertake capital projects, which will help to boost the economy.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in

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