Centre likely to beef up interest-free loans to states to push reforms and boost capital spending

In the full budget for fiscal 2025, the central government is likely to increase interest-free loans to the states in a bid to enhance reforms and capital spending, according to media reports. The additional funds will allow more room for state governments to spend freely on reforms and drive growth.

The infrastructure sector is crucial in driving India’s economic growth and development. Out of the total infrastructure spending, the states account for 20-25% of the budget. When the allocation happens as announced, it will be a huge boost for the states to invest in areas that will bring in major reforms.

In her budget speech in the Lok Sabha in February this year, Finance Minister Nirmala Sitharaman said that the union government will provide ₹75,000 crore interest-free loan for 50 years to support the states under ‘Viksit Bharat’. The central government envisions making India a developed nation by 2047. The Finance Minister said the government will present a detailed roadmap of its pursuit of 'Viksit Bharat,’ in the full budget in July.

The Budget documents reveal that in FY 2024-25, a total of ₹22,22,264 crore will be allocated to the states. This includes the states' share of funds, grants, loans, and money for centrally sponsored schemes. This is an increase of ₹4,13,848 crore over the actuals of the FY 2022-23.

In the interim budget in February, the central government estimated a meagre growth in nominal GDP of 10.5% in FY 2024-25, including real growth and inflation.

The revenue deficit for 2024-25 is targeted at 2% of GDP, which is lower than the revised estimate of 2.8% in 2023-24.

On the other hand, the fiscal deficit in 2024-25 is targeted at 5.1% of GDP, lower than the revised estimate of 5.8% of GDP in 2023-24.