Budget 2025: Incentives to set up working women's hostels could be cut from states' 50-year capex loans

The state loans play a pivotal role in meeting the Centre’s total capital expenditure targets

Budget 2025-26 is likely to continue the Union government's flagship capital expenditure (capex) loan scheme for states, providing 50-year interest-free loans for FY26. The scheme is expected to see significant modifications, though, with a renewed emphasis on urban land reforms and vehicle scrappage initiatives under its tied components, a senior government official said.

The capex loans are aimed at boosting public investments and creating durable assets. Introduced post-Covid in 2021-22, the scheme was part of the government’s efforts to enhance public investment and support states in infrastructure development and asset creation to boost post-pandemic economic recovery. The scheme ensures states have access to low-cost funds to undertake large-scale projects. By tying a portion of the loans to reforms (urban land reforms and vehicle scrappage), the scheme nudges states towards improved urban planning, land use policies and cleaner environments.

These priority areas will remain while provisions for working women’s hostels, part of the scheme earlier, are likely to be jettisoned. “Working women’s hostels are not needed. Urban reforms will continue, vehicle scrappage and land reforms will remain in focus,” the official told Moneycontrol.

Many states face fiscal constraints due to their commitments to welfare programmes and debt servicing. The 50-year interest-free loans provide a financial cushion, allowing them to fund large projects that require higher capital outlays without increasing states' debt burdens.

Of the Rs 1.5 lakh crore earmarked for FY25, Rs 55,000 crore come without riders, allowing states to deploy the funds for projects of their choice. The remaining Rs 95,000 crore is tied to reforms across industrial growth, land management and infrastructure development.

Urban land reforms, a focal point of the tied segment, is likely to include changes such as reforms to building bylaw, town planning schemes and transit-oriented development (TOD). The TOD approach emphasises higher floor area ratios (FAR) in metro development corridors to incentivise urban growth.

"These reforms aim to modernise urban planning by aligning with transit corridors. For instance, higher FAR would enable taller buildings, optimising space in rapidly growing urban areas,” the official added.

Another significant aspect of the tied loans is the focus on vehicle scrappage, an initiative aligned with the government’s green growth agenda. The scheme is expected to incentivise states to develop robust scrappage facilities and adopt eco-friendly practices to retire old and polluting vehicles.

By earmarking a significant capex loan to states as tied to reforms, the Union government aims to drive systemic changes in urban development. This initiative is vital for accelerating infrastructure development while empowering states to take ownership of key reforms, he explained.

The capex loans play a pivotal role in meeting the Centre’s total capital expenditure targets while addressing critical gaps in urban planning and environmental sustainability.