Government’s interest-free loan scheme drives state projects, reforms, and digital upgrades in FY 2025–26.

What if a person had ₹1.5 lakh crore and didn’t have to pay a single rupee of interest for 50 years? That is exactly what Indian states are dealing with in FY 2025–26, thanks to the Centre’s loan scheme meant to increase capital investment.

In August 2025, the Ministry of Finance announced that over ₹40,000 crore has already been disbursed under the Scheme for Special Assistance to States for Capital Investment (SASCI). This isn’t the full amount either. Another ₹20,000 crore is cleared and ready for disbursement. A total of ₹75,000 crore is expected to reach the states by the end of September 2025.

But this time, the money isn’t just for roads and bridges. It comes with conditions, reforms, digital systems, and modernisation.

Capex Loan Allocation To Indian States in 2024

The SASCI scheme started in FY 2020–21 with ₹12,000 crore. It was a pilot, a test run to see if long-term, interest-free loans could push states to spend more on capital projects. By FY 2024–25, it had already grown into a ₹1.49 lakh crore plan.

In February 2025, during the Union Budget for FY 2025–26, the Finance Minister confirmed a fresh allocation of ₹1.5 lakh crore. This time, more of the money would be tied to reforms.

Early versions of the scheme were simple. States needed to build infrastructure, and the Centre would fund it. But with each year, conditions have grown. States are now required to show progress in urban governance, tax reforms, and administrative transparency.

Financial Year	Allocation (Rs crore)	Nature of Support
2020–21	12,000	Pilot funding
2024–25	1,49,484 (released)	Project + Reform
2025–26 (BE)	1,50,000	Reform-linked + Infrastructure

The pattern shows how quickly the scheme has expanded in less than five years. It is now a central pillar of fiscal support for Indian states.

State-Wise Capital Expenditure Loan Distribution Rising With Reforms

Unlike early years, loans in FY 2025–26 are now tied to reforms. Two-thirds of the approved loans are conditional. These include digital governance upgrades, standardised financial systems, and new urban planning mandates.

The old system of simply funding flyovers is being replaced by a more layered approach.

Category	Share of Loan	Key Focus Areas
Governance reforms	40%	Municipal cadre, property tax portal
Infrastructure	35%	Roads, urban transport, bridges
Agriculture digital	15%	Farmer registries, crop surveys
Financial incentives	10%	DBT systems, SPARSH onboarding

This shift signals how states are being encouraged to modernise administration and service delivery, not just pour concrete.

Government Capex Loan Release Of Rs 40,000 Crore Marks Early Success

The Capex loan update in August 2025 showed that ₹40,000 crore had already been disbursed. Approvals touched ₹60,000 crore. The pace of release in FY 2025–26 is visibly faster than 2023–24, where many states waited until year-end to process disbursals.

This time, the Centre has insisted on front-loading.

Status in FY 2025–26	Amount (Rs crore)
Approved	60,000
Disbursed	40,000+
Expected by Sept	75,000 (projected)

This new pattern ensures smoother execution of projects. It also prevents delays often caused by bunching of disbursals at year-end.

Capex Funding Support For State Infrastructure Projects Gains Pace

There’s a visible shift in what the government is now funding under the scheme. While roads and power remain, new priorities have emerged, digital agriculture, direct benefit systems, and urban planning tools.

Incentive-linked allocations under reform-specific heads include:

Reform Incentive	Allocation (Rs crore)	Purpose
Digital Agriculture	6,000	Crop survey, farmer registry
Financial Efficiency	6,000	DBT and SPARSH reforms
Urban Planning Support	8,000	Modern planning units

These incentives are intended to ensure that the money does not only build structures but also modernises administration. It is a strategy to push states towards sustainable and transparent practices.

Karnataka Government Loan 2024 CAG Report Sparks Discussion

Meanwhile, the CAG findings on Karnataka ₹37,000 crore loan have raised concerns about the state’s fiscal discipline. The CAG report on Karnataka government loan increase, tabled in early August 2025, revealed that the Karnataka govt financing guarantees and borrowings rose sharply in 2024.

According to the report, the state borrowed ₹37,000 crore more in 2025. This is despite already touching high borrowing limits in FY 2023–24. The report raised questions about the nature of guarantees given for state-backed enterprises and the use of borrowed funds for revenue expenditure.

Such findings have brought into question how states balance central loans like Capex with their own debt models.

The Karnataka government loan 2024 CAG report highlighted issues such as:

Excessive use of off-budget borrowings.
Delays in servicing outstanding guarantees.
Weak tracking of debt-linked projects.

The state’s reliance on central loans is expected to grow further, making financial discipline more important than ever.

Conclusion

The Capex loan scheme has entered a new phase. With ₹40,000 crore disbursed by August 2025, and approvals hitting ₹60,000 crore, the scheme is not only about infrastructure anymore.

States like Karnataka, who are under watch for excessive borrowing, will now need to balance reform-linked central loans with internal fiscal responsibility. The Centre has changed the game by tying large funds to performance and digitisation. The real test, however, is whether the remaining ₹75,000 crore can be used well without triggering new debt concerns.

The roads are getting built, but so are systems that track every rupee spent.

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