State governments have urged the Centre to relax the norms for the release of the Rs 1.3 trillion interest-free capex loans to them in FY24, stating that some of these are impractical and would impede the efforts to boost capital spending.

In a virtual meeting with senior finance ministry officials on Thursday, finance secretaries of several states have sought removal of the condition that the third installment of the united part of the loan will be disbursed only to those states, which spend 45% of “own capex budget” in the first half of the fiscal.

The untied component of the loan is Rs 1 trillion, and this will be released in three equal installments, according to a circular issued by the Centre earlier.

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“As per the current norms, a state would not get the third installment of the untied loan if it does not achieve 45% of the annual target by September. We want proportionate release of funds if a state falls short of its target marginally,” a state government official, who attended the meeting, told FE.

The practice of extending capex loans to states began in 2020-21, following the onset of the pandemic, with a modest outlay of Rs 12,000 crore; this was raised to Rs 15,000 crore in 2021-22 and hiked steeply to Rs 1 trillion in 2022-23.

As per the Centre’s norms, the first installment of 33.3% (totalling Rs 33,300 crore for all states) of the untied loan would be released to each state government on meeting three fiduciary conditions: no re-branding of centrally sponsored schemes (CSS), sharing of scheme-wise spending data, and proof of deposit of the Centre’s share of the interest earned in Single Nodal Agency (SNA) account for each scheme.

To disincentivise delay in the release of CSS funds to SNAs, the Centre would deduct an amount equivalent to 15% of the amount to be released as the second installment of untied funds (Rs 33,000 crore for all states) in case funds are not released by the respective state within a 30-day time limit prescribed by the Centre.

According to the guidelines, a state has to share their treasury data every 21 days with the Centre’s Public Financial Management System in respect of all state schemes linked to CSS for which the state has received central funds. The states said such reporting coverage should be 95% for funds released in the past 30 days instead of 21 days. The finance ministry has agreed to this suggestion, another official said.

The second installment of untied funds would be released on utilisation of at least 75% of the first. The third installment under this part would be disbursed on utilisation of 75% of the amount released in the first two and on meeting 45% of the total target fixed for capex by each state in FY24. The third installment would be recovered from a state in FY25 if it fails to meet the annual investment target by March 2024.

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Accordingly, the states in aggregate would have invested Rs 6.12 trillion in FY24, excluding capex support given by the Centre and their debt repayments, if the loan facility extended by the Centre is made full use of.

Half of the ‘tied’ capex support of Rs 30,000 crore for reforms and specific purposes has been earmarked for urban planning reforms for efficient use of land resources, adequate resources for urban infrastructure, transit-oriented development, and enhanced availability and affordability of urban land. The remaining Rs 15,000 crore is earmarked for financing reforms in urban local bodies, setting up of Unity Malls in state capital cities, incentive to states for the scrapping of government vehicles/ambulances and increasing housing facilities for police personnel.

The Centre will shortly issue guidelines on each of the tied schemes.

Last year, when this special capex outlay was scaled up by more than six times to Rs 1 trillion, the release of funds started as late as October, owing to the fiduciary conditions and time taken by states to comply with them. As a consequence, the actual disbursement was Rs 81,200 crore, 18.8% lower than FY23 Budget estimate.