Infrastructure development can be India’s highway to prosperity. Currently its inadequacy translates into a marked disadvantage for industry, raising costs and reducing competitiveness. Acting on a Budget proposal, this week the Union Cabinet approved a detailed proposal for setting up a new development financial institution (DFI) to deal with this challenge. The wheel has turned a full circle. India started off with DFIs, before they fell out of fashion and some of them such as ICICI morphed into commercial banks. In today’s context, going back to the DFI model is a good step.
In emerging nations, financial markets are not sophisticated enough to meet the full spectrum of development needs. DFIs fill this gap with government support, particularly to fund riskier projects that require long-term money. They’ve played an important role in East Asia’s development. In India, the proposed DFI will be set up through a legislation and backed by Rs 20,000 crore of government capital. This foundation is expected to help it raise up to Rs 3 lakh crore from the market over a few years. This resource base is expected to turbo charge India’s infrastructure development.
The funding will be the relatively easy part. The real challenge may lie in DFI building the capacity to make the right calls in an uncertain environment. FM Sitharaman has promised a professional establishment, with market-linked pay. That’s the way to go but it remains to be seen if the government can avoid micromanagement in an institution it’s created. The immediate task however is to design a suitable legislative framework. We’re in the midst of a big change in economic structures because of digitisation. In this context, the operating framework for the DFI needs to be flexible enough to cater to a world where the very idea of infrastructure may transform.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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