Cheap central loans make state capital spending easier to fund and harder to assess

India’s long-maturity interest-free loans to states can make productive infrastructure easier to finance. Their value is harder to judge from the deficit or capital-spending headline alone. The RBI’s study of state budgets says consolidated state fiscal deficits rose to 3.3 per cent of GDP in 2024–25 after staying below three per cent in the preceding three years. It attributes much of the excess over three per cent to 50-year interest-free central loans under the Special Assistance to States for Capital Investment scheme. That finding makes the source and terms of financing essential to interpreting the higher deficit. RBI State Finances study of 2025–26 budgets · Union Budget 2026–27 expenditure profile

Two governments see a different financial transaction

For the Union, a loan creates a financial claim and requires funds to be made available today. For a state, it provides financing for spending and creates a liability that has to be repaid on the agreed terms. Counting both the Union disbursement and the state’s spending as two separate investments would overstate the combined public investment if the state uses the same funds to pay for a single asset. To measure economic activity, trace when the implementing body pays for work and when the work becomes usable. To measure fiscal risk, follow the financing and repayment obligations separately. RBI State Finances study of 2025–26 budgets · Union Budget 2026–27 expenditure profile

The concession can be large even though the principal remains due. In a stylised example, suppose a ₹100 crore interest-free loan is repaid in full after 50 years. At an assumed six per cent discount rate, the present value of that final payment is roughly ₹5.4 crore. If repayment were instead in equal instalments beginning much earlier, the present value would be higher. The example does not state the scheme’s repayment schedule or calculate its actual subsidy. It isolates the value of long deferral and explains why face value and economic cost are different measures.

A cheaper loan should change the choice of project

A state may bring forward a road, drainage network or other project when its usual financing cost makes it hard to fund. This can improve welfare if the project generates benefits earlier or would otherwise never proceed. The same loan can also replace ordinary finance on a project already scheduled. That frees resources for another use, which could itself be valuable. The two cases should be reported differently. A fair test compares the original state investment plan, the project funded by the loan, the timing of delivery and where any freed borrowing capacity or revenue went.

The RBI notes that consolidated state capital expenditure was 2.7 per cent of GDP in 2023–24 and 2024–25 and was budgeted at 3.2 per cent for 2025–26. A budgeted rise gives a benchmark for later comparison. It does not show how much work was executed or what would have happened without the central assistance. State-level analysis should distinguish approvals, loan releases, state payments, completion and use. One state may advance a project that was ready. Another can receive financing and face unresolved land or procurement issues. The finance works differently in those cases. RBI State Finances study of 2025–26 budgets

The case for concessionary finance

The strongest argument for the scheme is that infrastructure with benefits over many years is poorly matched to high near-term debt service, especially for a state facing a tight annual budget. A long, cheap loan can protect useful investment from a temporary financing constraint. The concern is that very cheap capital can weaken scrutiny of projects with uncertain benefits or high future operating costs. A state should appraise the service, maintenance and other commitments even when the Union provides the initial finance on attractive terms. The public return depends on the project, not simply on the gap between the loan terms and market borrowing. RBI State Finances study of 2025–26 budgets · Union Budget 2026–27 expenditure profile

A practical example is a facility needing recurring staff or maintenance after it opens. Its public cost includes those expenses and any other funding required to operate it at planned capacity. The state can show that in a forward budget and identify the department responsible. A project that becomes unusable for lack of maintenance can have a very low financing cost and a poor overall return. Reporting the two measures together gives legislators a basis for comparing projects even when their capital finance is equally concessional.

A useful appraisal would also account for delays. If the same asset opens a year later than planned, its users lose a year of benefits even if the construction cost is unchanged. Concessional finance may prevent that delay where the constraint is the timing of payment or procurement. Where the obstacle is administrative, extra finance may simply increase the balance held by the implementing agency. Tracking the dates of approvals, releases, contracts and work makes it possible to estimate how much of a timing improvement came from the loan.

The consolidated fiscal ratio should be accompanied by the stock and terms of liabilities. A state financed mainly with long obligations at predictable rates can face a different cash profile from one with the same reported debt ratio and several near-term repayments. Fiscal sustainability depends on interest, maturity, revenue and the use of borrowed funds. The borrowing source identified by the RBI makes that comparison more informative than a simple ranking by deficit. RBI State Finances study of 2025–26 budgets

The next accounts should connect finance to additional service

Publish funds released and spent, estimated completion dates, operating plans and the amount of additional investment relative to earlier budgets. Compare cash outlays with physical delivery and evidence of use. Where the central assistance speeds work and the state sustains the completed service, the concession has a credible return. If releases rise while projects stall or operating funds remain unassigned, the next improvement should address those constraints. A higher measured deficit can be consistent with good investment, and the evidence is in what the public can use and how long it remains available. RBI State Finances study of 2025–26 budgets · Union Budget 2026–27 expenditure profile