Centre tightens regulations for states' capital expenditure loans

Centre's move aims to ensure effective utilisation of funds

The central government has placed strict conditions on states to avail of the Rs 1.3 trillion in long-term loans for their capital expenditure (capex) needs in the approaching fiscal year (2023-24, or FY24) to ensure effective utilisation of funds.

Of the Rs 1.3 trillion, Rs 1 trillion will be ‘untied funds’. The rest will be tied to specific purposes like the scrapping of old government vehicles, urban planning reforms, financing reforms in urban local bodies to make them creditworthy for municipal bonds, housing for police personnel, constructing unity malls, libraries for children and adolescents, digital infrastructure, and state share of capex of central schemes.

However, even in untied funds, there are conditions to ensure that the money is effectively spent by states on capex projects. 

The untied amount of Rs 1 trillion will be divided into three equal instalments of roughly Rs 33,333 crore each, according to the guidelines sent by the Ministry of Finance to states in February.

The first instalment will be given to states after their capital projects are approved. If any amount given to them from the current fiscal year’s (2022-23) capex support is still pending after April 1, that amount will be deducted from the first tranche.

The second tranche will be given once states have spent at least 75 per cent of the first instalment. The third tranche will be given on spending 75 per cent of the first two instalments and 45 per cent of states’ respective capex targets for FY24. These targets should exclude the capex support from the Centre.

The Centre has informed states, in the guidelines issued, that if any state avails of the third instalment based on capex until September 30, 2023, but later fails to meet the FY24 capex target, the entire share of the third instalment given to it will be deducted from either its borrowing ceiling or from the scheme in 2024-25, if the scheme is continued that year.

The Rs 1 trillion untied funds will be given to states using the same formula as they get devolved from the divisible pool of central taxes. Hence, the maximum amount will go to Uttar Pradesh (Rs 17,939 crore), Bihar (Rs 10,058 crore), Madhya Pradesh (Rs 7,850 crore), West Bengal (Rs 7,523 crore), and Maharashtra (Rs 6,317 crore).

Of the remainder Rs 30,000 crore (approximately) of tied funds, Rs 15,000 crore is tied to urban planning reforms, Rs 5,000 crore on financing reforms in urban local bodies to make them creditworthy for municipal bonds, Rs 5,000 crore on the construction of unity malls, Rs 5,000 crore on libraries for children and adolescents, and digital infrastructure, Rs 3,000 crore on scrapping of old vehicles, and Rs 2,000 crore on police housing. States will also be disincentivised if there are delays in releasing their share of centrally sponsored schemes in certain cases. In this case, 15 per cent of the second instalment due to the states will be deducted.

In her 2023 Union Budget, Finance Minister Nirmala Sitharaman announced the expanded scheme, after states made a beeline for the Rs 1-trillion support in the current fiscal year.

“I have decided to continue the 50-year interest-free loan to state governments for one more year to spur investment in infrastructure and to incentivise them for complementary policy actions, with a significantly enhanced outlay of Rs 1.3 trillion,” she had said.