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Union Government announces ₹15,000 crore interest-free 50 year loan for states to spend on capital projects

After Rs 12,000 crore interest-free 50-year loan to states for capital projects was announced last year, Rs 15.000 crore more announced for the year 2021-22

The Union Finance Ministry has decided to provide an additional amount of upto Rs 15,000 crore to states as interest-free 50-year loans for spending on capital projects. The Department of Expenditure has issued fresh guidelines in this regard on the “Scheme of Financial Assistance to States for Capital Expenditure” for the financial year 2021-22.

Under this Scheme, financial assistance is being provided to the state governments in the form of 50-year interest free loan. Earlier in October last year, finance minister Nirmala Sitharaman had announced Rs 12,000 crore interest-free 50-year loan to states for capital projects in a bid to boost the economy. The loan was to be spent entirely on new or ongoing capital projects. This was part of the measures announced by the Narendra Modi govt to stimulate the economy following the Covid-19 lockdown.

The finance ministry said that out of Rs 12,000 crore announced last year, Rs.11,830.29 crore was released to the states. This helped to sustain state level capital expenditure in the pandemic year.

The new scheme for special assistance to states for capital expenditure for 2021-22 has three parts. The part 1 is for the North-East and hill states and an amount of Rs 2,600 crore has been earmarked for this part. Out of this, Assam, Himachal Pradesh and Uttarakhand will get Rs 400 crore each while remaining states in this group have been allocated Rs 200 crore each.

The part 2 is for all the remaining states, and the total amount allocated for them is Rs 7,400 crore. This amount has been allocated amongst these states in proportion to their share of central taxes as per the award of the 15th Finance Commission for the year 2021-22.

The part 3 of the scheme is for providing incentives for monetization/recycling of infrastructure assets and disinvestment of the State Public Sector Enterprises (SPSEs).  An amount of Rs 5,000 crore is allocated for this part of the scheme. Under this part, states will receive interest free 50 years loan ranging from 33% to 100% of the amount realised by them through assets monetization, listing and disinvestment.

The finance ministry has said that the funds provided to the states under the scheme shall be used for new and ongoing capital projects, for long term benefit to the state. The funds may also be used for settling pending bills in ongoing capital projects.

This scheme will help the states in boosting their economy at the time of Covid-19 pandemic by making capital expenditure on creating infrastructure. Capital expenditure creates employment, especially for the poor and unskilled. Moreover, it has a high multiplier effect, as it enhances the future productive capacity of the economy, and results in a higher rate of economic growth. Therefore, despite the adverse financial position of the Central Government, it was decided last year to launch a “Scheme for Special Assistance to States for Capital Expenditure”, the finance ministry said.

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