New Delhi, June 25 -- The Centre is overhauling a Rs.2 lakh crore loan scheme that supports capital expenditure in states, shifting from its post-pandemic strategy of higher spending to a focus on better outcomes. The Union finance ministry's Department of Expenditure has asked states and Union Territories (UTs) to limit their proposals under the scheme to a maximum of five self-selected sectors in FY27, two people involved in the process said. So far, states have been free to choose any number of sectors to receive these 50-year, interest-free loans, originally designed as a state support mechanism in FY21, but has since evolved into a flagship central scheme. The aim is to nudge states to make focused spending and avoid spreading resources thin across multiple projects, the first of the two officials said. States will retain flexibility to choose their priority sectors based on their respective requirements from a broad set of development indicators identified under the scheme. According to the second person, the Department of Expenditure has not prescribed any specific sectors under the Special Assistance to States for Capital Investment (SASCI) scheme. "The idea is to give states the flexibility to choose up to five priority sectors from a broad range of infrastructure areas based on their development needs," this person said. The investment priorities are expected to vary across regions. While the north-eastern states may like to focus on connectivity, tourism and logistics infrastructure, the Left-wing extremism-hit states could prioritize roads, healthcare, education and other basic infrastructure. Similarly, the water-stressed states may channel resources towards irrigation and drinking water projects, whereas the more urbanized ones could focus on transport, sanitation and other key urban infrastructure areas. The Centre's push for focused capex aligns with its broader vision of achieving developed-nation status for India by 2047 through sustained investments in infrastructure and productive assets. Economists said that limiting states' capex plans to five priority sectors under the scheme aims to ensure focused investments, avoid fragmentation of resources and achieve saturation in their key infrastructure requirements. "There is a tendency in state budgets to spread allocations across several programmes thinly to make diverse stakeholders happy. This leads to unfinished projects and impact of the programmes/projects not being realized for public service delivery," said Ranen Banerjee, partner and leader, economic advisory at PwC India. "The focus will help in taking projects to their logical completion or in undertaking larger interventions that make a visible impact on public service delivery." "This can be viewed as a positive shift toward outcome-oriented fiscal federalism," said Madhavi Arora, chief economist at Emkay Global Financial Services. "While the enhanced monitoring framework may reduce spending flexibility for some states, it is broadly aligned with the Centre's growing focus on improving the quality, efficiency and growth impact of capex, rather than merely increasing allocations." Under Part-I of the SASCI scheme for FY27, the Centre has allocated Rs.70,000 crore for states and UTs, based largely on the devolution formula recommended by the 16th Finance Commission. Uttar Pradesh received the highest allocation at Rs.11,805 crore, followed by Bihar (Rs.6,665 crore), Madhya Pradesh (Rs.4,922 crore), West Bengal (Rs.4,834 crore), Maharashtra (Rs.4,315 crore) and Rajasthan (Rs.3,970 crore). Part-I of the scheme has an outlay of Rs.75,000 crore, of which Rs.70,000 crore has been distributed among states and UTs, while the remaining Rs.5,000 crore has been reserved for balance releases towards previously approved projects such as unity malls-retail hubs to promote indigenous handicraft and handloom-police housing, working women hostels and tourism infrastructure. The assistance will be released in two tranches, with 66% of the approved allocation released after states meet mandatory conditions and the remaining 34% linked to utilization and compliance requirements. Besides the Rs.75,000 crore allocated under Part-I, the Centre has set aside Rs.10,000 crore under Part-II to support states' share of centrally-sponsored schemes and central infrastructure projects, and Rs.25,000 crore under Part-III as incentives for states meeting their capex targets. The balance will be used for sector-specific and reform-linked components such as AgriStack-digital public infrastructure for the farm sector-mining, telecom and livestock reforms. Queries on the development, sent to the spokesperson of the finance ministry and the chief secretaries of Bihar, Jharkhand, Uttar Pradesh, Delhi, West Bengal, Maharashtra, Rajasthan, Tamil Nadu, Karnataka, Kerala, Himachal Pradesh, Assam, Meghalaya and Haryana remained unanswered until press time....