- Context of Borrowing Space: Between FY2021 and FY2025, the Central Government allowed States an enhanced borrowing limit (up to 4% of GSDP, with an additional 0.5% conditional on power sector reforms) to combat the pandemic's economic impact.
- The 3% Deficit Norm: Under the Fiscal Responsibility and Budget Management (FRBM) Act, States are generally required to keep their fiscal deficit within 3% of GSDP. Recent data indicates that several states have breached this limit to maintain infrastructure spending.
- Central Assistance: To prevent a sharp decline in capital spending, the Centre launched the "Scheme for Special Assistance to States for Capital Investment," providing 50-year interest-free loans. In the 2025–26 Budget, this outlay has been set at ₹1.5 lakh crore.
- The Constraint: States face "committed liabilities"—salaries, pensions, and interest payments—which consume over 50% of their revenue receipts. When revenue falls, "discretionary" capital expenditure (roads, schools, hospitals) is often the first to be cut to meet deficit targets.
IAS-2026 - OPTIONAL / GEOGRAPHY / PUBLIC ADMINISTRATION / SOCIOLOGY / ANTHROPOLOGY / ORIENTATION ON 03 & 04-10-2025 
