Centre Ties State Capex Loan Access to Digital and Land Reforms in FY26 

Mumbai, 23 June 2025: The central government has introduced a revised set of reform-linked criteria for states seeking access to a portion of the ₹1.5 trillion interest-free capital expenditure (capex) loan earmarked for the financial year 2025–26. According to two individuals familiar with the matter, the new criteria will emphasise digital governance, land management reforms, financial systems improvement, and urban development initiatives. 

Focus on Targeted Reforms Across Key Sectors 

“States will now be expected to carry out targeted reforms in crucial areas such as developing digital public infrastructure (DPI) for agriculture, enhancing financial management mechanisms, upgrading urban planning processes, and streamlining land-related procedures,” said one of the individuals, who wished to remain unnamed. 

Breakdown of Fund Allocation 

Out of the total ₹1.5 trillion allocated for FY26, approximately 60% will be released unconditionally or earmarked for infrastructure development. The remaining 40% will be contingent upon the successful implementation of specific reforms by states and Union Territories, the same person added. 

Interest-Free Loans: A Crucial Economic Stimulus 

These 50-year interest-free loans have been pivotal in boosting states’ capital spending and supporting the wider economy, particularly in the wake of the COVID-19 pandemic. Currently, states are responsible for around 20–25% of India’s total infrastructure expenditure—an area of significant national priority. 

Digital Push in Agriculture and Governance 

The second person aware of the development stated that “this year’s reform focus aims to accelerate digital transformation in the agricultural sector via federated farmer databases, digitisation of land records, and comprehensive digital crop surveys.” 

Additionally, integration of Aadhaar-based Direct Benefit Transfers (DBT) with both the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) has been made compulsory across all state-administered welfare schemes. 

Land and Regulatory Changes Key to Growth 

“Land and regulatory reforms remain at the forefront. States will need to support mixed-use development, digitise approvals for land use change, rationalise industrial road width requirements, and revise construction regulations to minimise land wastage,” the second official noted. These measures are expected to drive improvements in manufacturing, agriculture, and overall business ease. 

Purpose Beyond Asset Creation 

“The objective is not solely to build physical infrastructure, but also to significantly enhance the quality of governance and service delivery at the state level,” the person added. 

Capex Scheme’s Role Since Inception 

Introduced in FY21, the central government’s 50-year interest-free capex loan scheme has become a cornerstone for state-led capital investments and economic revival post-pandemic. 

For FY26, the ₹1.5 trillion allocation will be used to fund state-level infrastructure development and projects. As with previous years, around 60% of the amount will be distributed without reform conditions or linked only to capital investments, while 40% will be conditional upon meeting specific reform milestones. 

Earlier Reform Mandates 

In the past two years, states seeking central assistance had to implement various reforms such as modernising the housing sector, incentivising the scrappage of outdated government vehicles and ambulances, reforming urban planning and finance, enhancing police housing capacity, and setting up digitally equipped libraries in panchayat and ward-level institutions for children and youth. 

Increased Allocations Over the Years 

Finance Minister Nirmala Sitharaman increased the allocation to ₹1.5 trillion for both FY25 and FY26, compared to ₹1.10 trillion in FY24. However, the FY25 provision was later revised to ₹1.25 trillion following lower-than-expected utilisation in the first half of the fiscal year, primarily due to the election season. 

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