Centre Nudges States to Focus Capex Loans on Five Priority Sectors; FM Backs Borrowing for Asset Creation

The Union government is reshaping the way it lends money to states for building infrastructure. Under its Special Assistance to States for Capital Investment (SASCI) scheme - a 50-year, interest-free loan window worth about Rs 2 trillion - the Department of Expenditure has asked states and Union Territories to limit their proposals to a maximum of five priority sectors in FY27. The idea is to move from simply pushing states to spend more, towards ensuring that the spending is focused and delivers measurable development outcomes.

Each state can pick its own five priority areas from a broad list of infrastructure and development indicators, based on its local needs. For example, north-eastern states may choose connectivity, tourism and logistics; states affected by Left-wing extremism may pick roads, healthcare and education; water-stressed states may focus on irrigation and drinking water; and more urbanised states may concentrate on transport and sanitation. Economists say this prevents resources from being spread too thin across many small projects, which often leaves works unfinished and reduces their impact. The push aligns with the Centre's Viksit Bharat 2047 vision of becoming a developed economy through sustained investment.

The scheme's structure shows how the money flows. Part-I has an outlay of Rs 75,000 crore, of which Rs 70,000 crore is shared among states largely using the devolution formula recommended by the 16th Finance Commission - Uttar Pradesh got the highest share at Rs 11,805 crore, followed by Bihar, Madhya Pradesh, West Bengal, Maharashtra and Rajasthan. The funds are released in two tranches: 66% after states meet mandatory conditions and 34% linked to actual use and compliance. Part-II (Rs 10,000 crore) supports states' share in centrally-sponsored schemes, and Part-III (Rs 25,000 crore) rewards states that meet their capex targets.

This drive comes alongside a clear message from the Union Finance Minister, who said that state borrowing is justified as long as the borrowed money is spent on long-term capital expenditure - such as schools and hospitals - rather than on revenue spending like cash handouts. She noted that what matters is whether the borrowing creates assets, improves education, promotes industry or generates jobs, and reminded that states are allowed to borrow up to 3% of their Gross State Domestic Product (GSDP). For India, this reflects a shift towards "outcome-oriented fiscal federalism" - the Centre and states working together so that public money produces visible results.

For aspirants, remember key facts: SASCI is a 50-year interest-free capex loan scheme for states, launched in FY21 as a post-pandemic stimulus and continued since; the FY27 change caps proposals at five priority sectors; Part-I outlay is Rs 75,000 crore (UP got the largest share); states can borrow up to 3% of GSDP; and the guiding ideas are Viksit Bharat 2047 and the 16th Finance Commission's devolution formula. The Economic Survey 2025-26 noted SASCI helped states keep capex at around 2.4% of GDP.