Sitharaman urges states to tap Centre's interest-free capex loan scheme to drive growth
'When you build capital assets, employment increases, core sectors benefit, and the multiplier effect is a lot more than just putting money in people's hands,' Sitharaman said while speaking at a public event in Shillong.
The minister said the central government aimed to empower states to invest in physical and social infrastructure post-Covid pandemic. '(The nation's) economic recovery is dependent on states' recovery as well,' she added.
Introduced in 2020-21 (FY21), the Centre's 50-year interest-free capex loan scheme has been crucial to driving capital spending by states and stimulating the economy post-pandemic.
For FY26, the Centre has allocated ₹ 1.5 trillion for these loans, aiming to boost public infrastructure spending and support state-level capital projects.
Of the ₹ 1.5 trillion earmarked for FY26, around 60% will be unconditional or linked to infrastructure spending, while the remaining 40% will be tied to reforms that states.
Union territories were included under the scheme in FY26.
Sitharaman said that these loans to states go beyond the constitutionally mandated transfers under the Finance Commission and reflect Prime Minister Narendra Modi's deeper understanding of states' development challenges.
'These funds come without interest, and repayment is due only after five decades, and even that may be waived. The focus is on creating long-term public assets, not short-term handouts,' the minister said.
The Finance Commission of India is a constitutional body established under Article 280 to recommend how the Centre's revenues should be distributed between the Union and the states.
It determines the vertical devolution (share of taxes between Centre and states) and horizontal devolution (distribution among states), based on factors such as population, income levels, and fiscal performance.
The Centre has significantly increased the scheme's allocation to ₹ 1.5 trillion each for FY25 and FY26, up from ₹ 1.10 trillion in FY24, although the FY25 allocation was revised to ₹ 1.25 trillion due to a slowdown in the first half of the fiscal year, mainly due to elections.
On 27 April, Mint reported that states' total outstanding liabilities under the scheme are expected to exceed ₹ 3.5 trillion by end-FY25.
Sitharaman highlighted a series of major infrastructure and institutional investments in Meghalaya, funded by the central government, many of them through the capital expenditure scheme.
These projects, she said, reflect the government's long-term commitment to the development of the Northeast and are aimed at boosting economic opportunities, connectivity, and access to services in the region.
Among the key initiatives is the redevelopment of Umiam Lake, with a central outlay of ₹ 99.99 crore, alongside the creation of a world-class MICE (meetings, incentives, conferences and exhibitions) hub to host large events, including G20-style gatherings.
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