Special Assistance To States For Capital Investment (2020-21): Incentivising Fiscal Reform Through Capital Grants

Policy Update
Nayanshi Jain

Introduction 

The COVID-19 pandemic triggered an unprecedented economic shock, severely straining the fiscal capacity of Indian states. Nationwide lockdowns disrupted economic activity, leading to a sharp decline in tax revenues while simultaneously increasing expenditure on healthcare, social protection, and economic relief measures. As states account for nearly two-thirds of India’s public capital expenditure, the contraction in their fiscal space posed a significant risk to infrastructure creation and long-term economic recovery. 

Against this backdrop, capital expenditure emerged as a critical policy instrument due to its high fiscal multiplier and its ability to generate durable economic assets, stimulate employment, and crowd in private investment. Recognising that sustained public investment would be essential for reviving growth, the Government of India introduced the Scheme for Special Assistance to States for Capital Expenditure (SASCI) in October 2020 as part of the Atmanirbhar Bharat package. The scheme initially provided ₹12,000 crore in the form of 50-year interest-free loans to states, encouraging them to maintain capital investment despite fiscal constraints while also incentivising governance reforms through performance-linked assistance. 

The Political Economy Behind the Scheme

The launch of the Special Assistance to States for Capital Investment (SASCI) was shaped by an extraordinary fiscal crisis. The COVID-19 pandemic led to a sharp contraction in economic activity, causing states to witness steep declines in GST collections, stamp duties, and other own-source revenues. Simultaneously, delays in GST compensation payments and rising expenditure on health, welfare, and relief measures significantly constrained their fiscal capacity, leaving limited room for developmental spending. 

Among the first casualties of this fiscal stress was capital expenditure, as states prioritised immediate revenue expenditure such as salaries, pensions, healthcare, and social assistance. However, reducing capital investment risked slowing infrastructure creation, employment generation, and long-term economic growth. Recognising the high multiplier effect of public investment, the Centre sought to revive aggregate demand while preserving fiscal prudence. Instead of unconditional grants, it introduced 50-year interest-free loans, enabling states to undertake productive capital projects without adding interest liabilities or creating immediate repayment pressures. 

This design marked a significant fiscal innovation. By providing long-term, interest-free financing exclusively for capital expenditure and gradually linking portions of the assistance to governance and structural reforms, the scheme moved beyond conventional fiscal transfers. It combined macroeconomic stimulus with incentives for better fiscal management, signalling a shift towards performance-oriented cooperative federalism, where financial support was aligned with both infrastructure creation and institutional reform. 

Evolution of the Scheme

SASCI’s trajectory reflects a striking shift from emergency fiscal support to a more permanent instrument of Centre-State investment policy. Launched in October 2020 with an outlay of ₹12,000 crore, the scheme saw ₹11,830.29 crore actually released in its first year. Its initial architecture already contained a reform dimension: ₹2,000 crore was reserved for states completing at least three of four specified reforms—One Nation One Ration Card, Ease of Doing Business, urban local body/utility reforms, and power-sector reforms. Eleven states ultimately received enhanced allocations for meeting the stipulated reform conditions. 

What followed was a rapid expansion in scale. The provision rose to ₹15,000 crore in 2021-22, before the Union Budget 2022-23 made a major leap by providing ₹1 lakh crore in 50-year interest-free loans, over and above states’ normal borrowing limits. The scheme also began targeting specific investment priorities: for instance, ₹3,000 crore was earmarked for optical-fibre infrastructure in 2022-23, while a separate ₹6,000-crore urban reforms component incentivised changes in urban planning and governance. 

The transformation became particularly visible in 2023-24, when the allocation increased to ₹1.30 lakh crore. Of this, ₹1 lakh crore constituted broadly untied capital assistance, distributed according to states’ share in central taxes, while ₹30,000 crore was linked to incentives across eight reform areas. These extended beyond conventional infrastructure financing to areas such as urban planning, vehicle scrappage, police housing, libraries with digital infrastructure, and other sectoral reforms. By December 2023, ₹91,471 crore of capital expenditure had already been approved under the ₹1 lakh crore untied component. 

The significance of this evolution lies therefore not merely in the increase in allocations, but in the changing logic of intergovernmental transfers. SASCI increasingly combines two functions: providing states with long-duration fiscal space for productive investment and using access to additional resources to encourage specified reforms. Its institutionalisation is evident in the Sixteenth Finance Commission’s assessment, which describes SASCI as an important instrument for boosting state capital expenditure and notes that most states consulted by the Commission supported its continuation. 

Institutional Design and Fiscal Architecture: Functioning of SASCI 

The institutional design of SASCI distinguishes it from conventional Centre-State transfers. Assistance is extended as a 50-year interest-free loan, creating an unusually long repayment horizon while imposing no interest burden on states. Crucially, these loans are over and above states’ normal borrowing ceilings, allowing additional capital spending without crowding out their existing fiscal space. This makes SASCI a form of highly concessional capital financing rather than a conventional grant. 

The Department of Expenditure (DoE), Ministry of Finance, anchors the scheme. States submit capital investment proposals in accordance with annual scheme guidelines, after which projects are scrutinised and approved by the DoE. For sector-specific components, the relevant Union ministry or department evaluates performance or recommends proposals—for example, the Ministry of Housing and Urban Affairs monitors urban-reform components, while the Department of Telecommunications has recommended optical-fibre projects. This creates a two-tier architecture combining central fiscal oversight with sectoral expertise. 

Disbursement is also designed to enforce implementation discipline. Funds are not simply transferred upon allocation: approval and release are distinct stages, with subsequent releases linked to eligibility and compliance with scheme conditions. This is visible in 2023-24, when the DoE approved ₹1,27,492.05 crore but released ₹1,09,554.30 crore to eligible states. States, therefore, bear responsibility for identifying viable projects, ensuring timely utilisation of funds, meeting stipulated reform conditions where applicable, and providing the required implementation and expenditure documentation. 

The architecture thus embeds a subtle but important principle: fiscal support is paired with accountability. The Centre provides states with exceptionally low-cost, long-duration financing, while retaining oversight through project appraisal, conditionality, sectoral monitoring and staged fund release. SASCI consequently operates as a hybrid of fiscal transfer, investment financing and performance-based governance, rather than merely another channel of central assistance.

Reform-Linked Incentives: A New Model of Fiscal Federalism

From expenditure support to reform incentives: SASCI transformed capital assistance from an unconditional fiscal transfer into a performance-linked incentive mechanism, where states receive additional assistance only upon achieving prescribed reform milestones. This reflects a shift towards outcome-based public finance rather than input-based funding. 

• Broadening the reform agenda: While the initial scheme incentivised reforms such as Ease of Doing Business, One Nation One Ration Card, power sector reforms, and urban local body reforms, subsequent versions expanded the reform basket to include:

1. Urban planning and governance
2. Digitisation of land records
3. Mining sector reforms
4. Financial management
5. Road safety and vehicle scrappage
6. Rural and urban land reforms
7. Digital Public Infrastructure (DPI) for Agriculture 

Urban planning as a flagship reform: Recognising rapid urbanisation as a development challenge, the 2023-24 SASCI earmarked ₹15,000 crore for Urban Planning Reforms. States were incentivised to implement Town Planning/Land Pooling Schemes, modernise building bye-laws, adopt Transit-Oriented Development (TOD), promote Transferable Development Rights (TDR), strengthen planning institutions, and integrate climate-resilient urban planning. 

• Sector-specific governance reforms: Later iterations introduced dedicated incentive components for mining governance, land administration, financial management, municipal finance, and capital expenditure performance, reflecting a shift from financing infrastructure alone to improving the quality of public institutions and governance. 

• Institutionalising performance-based federalism: Unlike traditional Finance Commission transfers or Centrally Sponsored Schemes, SASCI rewards reform outcomes rather than fiscal need alone. States implementing reforms gain preferential access to concessional financing, strengthening accountability and encouraging policy innovation. 

• Catalysing competitive cooperative federalism: By linking financial assistance to measurable reforms, SASCI encourages states to compete in improving governance while working within a cooperative federal framework. The scheme therefore represents an emerging model of incentive-based fiscal federalism, where capital investment serves as both an instrument of economic growth and a catalyst for structural governance reforms. 

Economic Impact Assessment

• Significant rise in state capital expenditure: Since its launch in 2020-21, SASCI has emerged as a major driver of state capital investment. The scheme’s allocation increased from ₹12,000 crore in 2020-21 to ₹1.5 lakh crore in 2025-26, with cumulative releases of ₹4.5 lakh crore (FY21-FY26, till January 2026), substantially expanding the fiscal space available for infrastructure creation. 

• Higher infrastructure investment and productive asset creation: The concessional financing enabled states to accelerate investment in roads, bridges, irrigation systems, healthcare facilities, educational infrastructure, urban development, and digital connectivity. By protecting capital expenditure during periods of fiscal stress, SASCI helped prevent the postponement of long-term development projects. 

• Boost to employment and private investment: Public capital expenditure has a high fiscal multiplier, generating direct employment in construction and allied industries while improving infrastructure that lowers business costs and crowds in private investment. The Economic Survey notes that reforms linked to SASCI enhance the marginal productivity of capital, strengthening the economy’s long-term growth trajectory. 

• Visible improvement in capital spending trends: According to the State Bank of India’s Ecowrap, states’ capital expenditure increased from 2.2% of GDP in 2021-22 to 2.7% in 2024-25, indicating that SASCI has played a significant role in sustaining public investment despite fiscal consolidation. 

• Growing dependence on SASCI financing: PRS Legislative Research estimates that SASCI loans financed around 19% of states’ total capital outlay in 2024–25, compared to just 2.9% in 2020–21, underscoring the scheme’s growing importance in state investment planning. 

• Uneven utilisation across states: While overall implementation has been positive, utilisation patterns vary considerably across states due to differences in fiscal capacity, administrative preparedness, and project execution. This divergence highlights the need for stronger implementation support and monitoring to ensure equitable development outcomes. 

• Strengthening long-term productive capacity: Beyond short-term economic stimulus, SASCI has contributed to expanding India’s productive capacity by financing durable public assets and incentivising complementary governance reforms. The scheme has therefore evolved into an instrument that supports sustainable growth, infrastructure-led development, and stronger state fiscal capacity, making it a key pillar of India’s public investment strategy. 

Fiscal Federalism Perspective: Balancing Incentives and State Autonomy

• A shift towards incentive-based fiscal federalism: Unlike traditional untied transfers recommended by the Finance Commission, SASCI links a part of fiscal assistance to capital expenditure and policy reforms. This reflects the principle of incentive compatibility, where states are encouraged to undertake reforms because the financial rewards align with their developmental objectives, improving the efficiency of public spending. The scheme thus moves beyond revenue sharing towards performance-oriented intergovernmental transfers. (Finance Commission discussions; Ministry of Finance guidelines)

• Strengthening cooperative federalism: By providing 50-year interest-free loans while allowing states flexibility in selecting eligible capital projects, SASCI reinforces cooperative federalism. It enables the Centre and states to pursue shared national priorities, such as infrastructure development, urban reforms, and digital governance—without replacing the constitutional fiscal responsibilities of states.

• Conditionality and the risk of centralisation: At the same time, the scheme introduces an element of conditional centralisation. Access to a portion of financial assistance depends on compliance with reform benchmarks designed by the Union Government. While this strengthens accountability, it also raises concerns about whether centrally determined priorities may reduce states’ fiscal autonomy and policy discretion. This reflects the classic principal–agent problem, where the Centre (principal) uses financial incentives to influence the policy choices of states (agents).

Do richer states gain a comparative advantage? States with stronger administrative capacity, healthier fiscal positions, and greater institutional readiness are generally better placed to design projects, fulfil reform conditions, and utilise funds efficiently. Conversely, fiscally weaker or capacity-constrained states may struggle to access the full benefits of the scheme, potentially widening inter-state developmental disparities despite uniform eligibility criteria. (PRS Legislative Research)

• Public finance perspective: From a public finance standpoint, SASCI represents a transition from need-based fiscal transfers to outcome-based fiscal incentives. By rewarding productive investment and governance reforms, it seeks to improve the quality of public expenditure and reduce inefficiencies. However, sustaining equity within India’s federal system will require complementary measures such as capacity-building, technical assistance, and differentiated support for less-developed states.

Comparative Analysis: How SASCI Differs from Other Fiscal Transfer Mechanisms

Table 1: Differences Between SASCI and Other Fiscal Transfer Instruments

International Perspective

• European Union– Recovery and Resilience Facility (RRF): Like SASCI, the EU’s €723.8 billion Recovery and Resilience Facility links financial support to the achievement of agreed reforms and investment milestones, demonstrating a global shift towards performance-based fiscal transfers rather than unconditional stimulus. This reflects a similar philosophy of using public finance to accelerate structural transformation. 

• Australia and Canada: Fiscal transfers are largely formula-based and unconditional, prioritising horizontal fiscal equalisation to reduce regional disparities. Compared with these systems, SASCI places greater emphasis on incentivising reforms and capital investment, making it a more interventionist model of intergovernmental finance.

• Germany: Through its system of Länder Fiscal Equalisation (Länderfinanzausgleich), Germany primarily redistributes revenues to ensure comparable living standards across states. In contrast, SASCI is forward-looking, rewarding states for undertaking investments and governance reforms rather than focusing solely on equalisation.

Challenges and Policy Gaps

Despite its innovative design, SASCI is not without limitations. Its long-term effectiveness depends not only on the availability of concessional financing but also on states’ institutional capacity to translate financial assistance into productive outcomes.

• Uneven implementation across states: States with stronger administrative systems and better project pipelines have consistently utilised a larger share of the assistance, while fiscally weaker and capacity-constrained states have struggled to meet reform conditions and absorb funds. This raises concerns that a uniform incentive framework may inadvertently widen inter-state developmental disparities rather than reduce them. 

• Administrative and institutional capacity constraints: The scheme requires states to prepare technically sound projects, satisfy reform milestones, and comply with detailed reporting requirements. Many states, particularly those with weaker planning institutions and limited technical expertise, face difficulties in project preparation and implementation, restricting their ability to fully leverage the scheme.

• Delays in project execution and fund utilisation: Although approvals have increased substantially, sanctioning funds does not necessarily translate into timely project completion. Land acquisition issues, procurement delays, environmental clearances, and coordination challenges often slow execution, reducing the counter-cyclical impact of capital expenditure and delaying the creation of productive assets.

• Monitoring focuses more on expenditure than outcomes: Existing oversight mechanisms largely assess whether funds have been released and utilised, with comparatively less emphasis on evaluating whether projects have improved productivity, employment, service delivery, or infrastructure quality. This creates a risk of measuring financial compliance rather than developmental impact.

• Limited outcome-based assessment: Despite being presented as a performance-linked scheme, there is no comprehensive public evaluation framework measuring the long-term economic returns of SASCI-funded projects. Indicators such as cost efficiency, asset quality, employment generated, private investment mobilised, and socio-economic outcomes remain insufficiently documented, limiting evidence-based policy refinement.

• Dependence on central incentives: The growing scale of SASCI has increased states’ reliance on centrally designed incentive mechanisms to finance capital expenditure. While this has stimulated investment, it may gradually weaken states’ incentives to mobilise their own revenues and independently prioritise long-term capital planning, potentially increasing fiscal dependence on the Union Government.

• Balancing reform conditionality with state autonomy: Linking financial assistance to centrally prescribed reforms improves accountability but also raises concerns regarding fiscal autonomy. Uniform reform benchmarks may not adequately reflect differences in states’ economic structures, institutional capacities, or development priorities, reducing policy flexibility within India’s asymmetric federal framework.

SASCI has successfully reoriented fiscal transfers towards investment and governance reforms; however, its success cannot be judged solely by the volume of funds disbursed. Without stronger institutional capacity, independent outcome evaluation, differentiated support for lagging states, and greater flexibility in reform design, the scheme risks becoming a high-disbursement, low-impact programme. For SASCI to remain a credible model of performance-based fiscal federalism, the emphasis must shift from “how much money is spent” to “what developmental outcomes are achieved.”

The Way Forward: Towards Fiscal Reform 2.0

To maximise the developmental impact of SASCI, future iterations should move beyond capital allocation towards measuring the quality, sustainability, and long-term outcomes of public investment. Key policy priorities include:

• Institutionalise outcome-based evaluation: Shift from expenditure-based monitoring to results-based assessment, using indicators such as infrastructure quality, employment generated, productivity gains, private investment leveraged, and service delivery improvements.

• Promote green and climate-resilient infrastructure: Introduce dedicated incentive windows for renewable energy, climate-resilient urban infrastructure, sustainable transport, water security, and disaster-resilient public assets, aligning capital expenditure with India’s Net Zero 2070 commitment and SDG targets.

• Strengthen digital monitoring and transparency: Develop a real-time national digital dashboard integrating GIS mapping, project milestones, expenditure tracking, and outcome indicators to improve transparency, reduce implementation delays, and enable timely corrective action.

• Institutionalise independent impact assessments: Periodic evaluations by independent institutions such as NITI Aayog, the Comptroller and Auditor General (CAG), or accredited research organisations should assess the economic and social returns of SASCI-funded projects, generating evidence for future policy design.

• Build state-level institutional capacity: Provide technical assistance for project preparation, procurement, financial management, and monitoring, particularly for fiscally weaker states, ensuring that differences in administrative capacity do not translate into unequal access to fiscal incentives.

• Allow greater flexibility for state-specific priorities: While maintaining broad national objectives, future guidelines should permit states to tailor investments to their unique developmental needs, reducing the risk of a one-size-fits-all reform framework.

• Align incentives with the Sustainable Development Goals (SDGs): Future assistance could reward measurable progress in areas such as sustainable cities (SDG 11), clean energy (SDG 7), resilient infrastructure (SDG 9), climate action (SDG 13), and reduced regional inequalities (SDG 10), integrating fiscal policy with India’s broader sustainable development agenda.

Ultimately, SASCI marks a significant evolution in India’s fiscal architecture by transforming state support from a mechanism of borrowing assistance into one of performance-driven fiscal governance. By linking concessional financing with capital investment and structural reforms, the scheme demonstrates how intergovernmental fiscal transfers can incentivise institutional improvements rather than merely compensate for revenue shortfalls. Its enduring success, however, will depend on balancing state autonomy with accountability, strengthening implementation capacity, and ensuring that performance-based incentives promote inclusive and equitable development across all states. If complemented by robust outcome evaluation and greater policy flexibility, SASCI has the potential to become a defining model of cooperative and competitive federalism, shaping the next generation of fiscal reforms in India.

References 

• Press Information Bureau. (Various years). Press releases on the Scheme for Special Assistance to States for Capital Investment. Government of India. https://www.pib.gov.in

About the Contributor: 

Nayanshi Jain is a Research and Editorial Intern at IMPRI and a student of Economics and Political Science at St. Stephen’s College, Delhi. Her research interests lie in international political economy, monetary and financial systems, public policy, developmental economics, welfare economics, behavioural economics, and sustainable development.

Acknowledgement: 

The author extends her sincerest gratitude to the IMPRI team for their expert guidance and constructive feedback throughout the process.

Reviewers: Rashi Kothari and Pragya Raghav

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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