In a gesture of goodwill towards the states, Finance Minister Nirmala Sitharaman announced on Thursday that the Centre might convert the substantial amounts provided to states into grants.
Since the introduction of the ‘Scheme for Special Assistance to States for Capital Expenditure’ to support states in the wake of Covid, the Centre has disbursed ₹2.17 trillion and is expected to allocate an additional ₹1.5 trillion in FY25, bringing the total to ₹3.7 trillion for FY21-FY25.
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A grant and a loan are both forms of financial assistance, but they differ significantly in terms of purpose, terms of repayment, and expectations.
A grant is typically awarded by a government, foundation, institution, or corporation to support a specific project, initiative, or individual. Grants are usually non-repayable and are intended to achieve social, educational, scientific, or cultural goals. They do not require repayment as long as the recipient complies with the terms and conditions.
A loan, on the other hand, is a sum of money borrowed from a lender (like a bank or financial institution) with the agreement to repay it, usually with interest, over a specified period. Loans can be used for various purposes, such as personal expenses, business investments, or education, and are expected to be repaid according to a predetermined schedule.
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Repayment:
Grants do not require repayment under normal circumstances. However, some grants may have conditions attached, such as achieving certain outcomes or milestones.
Loans must be repaid in full, typically with interest. The terms of repayment (monthly instalments, interest rates, etc.) are agreed upon between the borrower and the lender at the time of borrowing.
Approval:
Grants often involve a competitive application process where applicants must demonstrate how the funds will be used and the expected impact. Grants may have specific conditions or reporting requirements to ensure that the funds are used as intended.
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Loans require a credit evaluation of the borrower’s ability to repay. The approval is based on factors like credit history, income, and collateral (if applicable). Loans may have conditions related to the use of funds but are primarily focused on repayment terms.
Unlike loans, grants from the Centre to States do not require any repayment.
We are encouraging states to undertake capital expenditure by offering them interest-free 50-year loans, which will likely be treated as grants in the future, the Finance Minister explained during the Finance Bill 2025 debate.
She added that this approach has enabled states to advance their capital expenditure, leading to the completion of long-delayed projects and the initiation of new ones.
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The minister highlighted that Prime Minister Narendra Modi’s focus on capital expenditure after Covid hit FY21 has contributed to India’s position as the fastest-growing economy, a trend that may continue into FY25.
The Rajya Sabha has approved the Finance Bill, finalising the FY25 Budget. Sitharaman noted that the Budget addresses various priorities, including growth, job creation, capital expenditure, and fiscal consolidation.
Addressing concerns about insolvency cases, Sitharaman assured that defaulting promoters are barred from re-bidding for their own companies to prevent them from acquiring assets at reduced prices.
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Regarding last year’s allocation of ₹1.44 trillion, she noted that this year’s allocation has increased to ₹1.52 trillion, an additional ₹8,000 crore.
In response to concerns about household savings, Sitharaman mentioned that small savings alone do not constitute the entire savings portfolio. People are diversifying into various investment options, and financial household savings now include a broader range of portfolios available to smaller families.
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