What Is The SASCI Scheme? India's 50-Year Interest-Free Loan Programme |Explained

The Centre is looking to sharpen the impact of one of its biggest state infrastructure financing programmes by asking states and Union Territories to limit their proposals under the Special Assistance to States for Capital Investment (SASCI) scheme to a maximum of five priority sectors.

According to a Mint report, the Department of Expenditure (DoE) has advised states to focus their proposals under the ₹2 lakh crore, 50-year interest-free loan scheme on a limited number of sectors during FY27. The move is aimed at improving project execution, ensuring better utilisation of funds and preventing resources from being spread across too many projects.

The proposal marks the latest evolution of a scheme that has become one of the Centre's key tools for supporting infrastructure-led growth while encouraging governance reforms at the state level.

What Is the SASCI Scheme?

Launched by the Ministry of Finance during the Covid-19 pandemic in FY21, the Special Assistance to States for Capital Investment (SASCI) was designed to prevent a sharp slowdown in public investment when state finances came under pressure.

Instead of providing grants, the Centre offers 50-year interest-free loans that enable states and Union Territories to finance capital expenditure without adding immediate debt-servicing costs.

Over the years, the scheme has expanded significantly. What began as a ₹12,000 crore emergency programme has grown into a ₹2 lakh crore capital investment framework, making it one of the government's largest instruments for supporting state-led infrastructure development.

Apart from financing roads, irrigation, urban infrastructure and public assets, the scheme also supports projects such as the development of iconic tourist destinations and incentivises reforms in areas including mining, road safety, digitisation of land records and urban planning.

Why Is the Centre Introducing the Five-Sector Rule?

The Centre believes that many states have been spreading SASCI funds across too many projects, resulting in fragmented spending and slower implementation.

To address this, states will now be expected to prioritise no more than five sectors while preparing project proposals.

Rather than distributing funds thinly across multiple schemes, the government wants states to adopt a "saturation approach"—concentrating investments in fewer sectors so that projects are completed faster and deliver measurable economic benefits.

States will continue to enjoy flexibility in choosing their priority sectors based on local development needs.

For example, northeastern states may prioritise connectivity, tourism and logistics infrastructure, while water-stressed states could focus on irrigation and drinking water projects. Similarly, states affected by Left-Wing Extremism may channel investments into roads, healthcare, education and other essential infrastructure.

Improving Fund Utilisation

The new rule also addresses concerns over declining fund utilisation.

Data cited in the Mint report shows that execution efficiency has weakened in recent years. While 17 of 28 states achieved full utilisation of SASCI funds in FY21, no state managed 100% utilisation by FY25.

Administrative constraints, fiscal pressures and the growing number of sanctioned projects have made it increasingly difficult for states to implement infrastructure projects efficiently.

By limiting the number of sectors, the Centre hopes state public works departments can better manage project execution and avoid overcommitting administrative resources.

How Has SASCI Changed State Spending?

Since its launch, SASCI has significantly reshaped how states allocate capital expenditure. One of its biggest achievements has been protecting infrastructure spending during periods of fiscal stress.

By providing borrowing outside the normal Net Borrowing Ceiling (NBC), the scheme has allowed states to sustain capital expenditure despite rising revenue commitments such as salaries, pensions and subsidies.

The programme has also shifted funding from largely unconditional transfers to performance-linked incentives.

A significant share of SASCI allocations is now tied to reforms, encouraging states to modernise governance systems rather than simply spend on infrastructure.

To qualify for funding, several states have updated urban planning regulations, digitised land records, modernised procurement systems and integrated expenditure tracking through the Public Financial Management System (PFMS).

The scheme also follows a performance-based disbursement model, with additional instalments released only after states demonstrate substantial utilisation of previously sanctioned funds.

Why Interest-Free Loans?

Instead of grants, the Centre offers long-term interest-free loans because capital expenditure generates a much larger economic multiplier than revenue expenditure.

Government estimates suggest that every ₹1 spent on infrastructure can generate between ₹3 and ₹4.5 of economic output over time.

The loans also help prevent states from cutting infrastructure investment when fiscal pressures mount. Since these borrowings are provided over and above normal borrowing limits, states gain additional fiscal space without breaching deficit targets.

How Are Funds Allocated?

The bulk of SASCI funding is distributed using the Finance Commission's horizontal devolution formula, which considers factors such as population, income distance, demographic performance and forest cover.

States with larger populations and greater development needs, including Uttar Pradesh and Bihar, receive larger baseline allocations.

A portion of the funding, however, is reserved for performance incentives. States that significantly increase capital expenditure or achieve implementation milestones become eligible for additional financial support.