The Union Cabinet on March 16, 2021, gave its approval to a bill for setting up a Development Finance Institution- DFI in order to raise long-term capital to fund infrastructure development, as the government has envisioned an investment of Rs. 111 lakh crore by the year 2025.
The government has also proposed an initial capital infusion of Rs. 20,000 crores in order to capitalize the Development Finance Institution. The proposed legislation will give effect to the Budget announcement on February 1 by the Union Finance Minister Nirmala Sitharaman.
After the Cabinet Meeting, the Finance Minister mentioned that she is happy that the bill has been cleared by the cabinet through which there will be an institution and institutional arrangement which will help in raising the long-term finance.
She further added that the government expects the proposed institution to raise up to Rs. 3 lakh crores in the next few years as it will have access to the market funds, which otherwise are not available. The Development Finance Institution will also get tax benefits for 10 years.
Union #Cabinet has cleared the setting up of a development Finance Institution, in acknowledgement of the realization that both development and financial objectives will matter for setting up a DFI
— PIB in Maharashtra 🇮🇳 (@PIBMumbai) March 16, 2021
- FM @nsitharaman briefs media on #CabinetDecisionshttps://t.co/jiYNKSOcJ9
Objective:
The Development Finance Institution is expected to raise long-term funds for the infrastructure development projects in the country.
The Finance Minister has also informed that the initial grant to the institution will be Rs. 5,000 crores and that the additional increments of grants will be made within the limit of Rs. 5,000 crores.
Key Details:
• The Development Finance Institution will be managed by a professional board. It will comprise at least 50%, non-official directors.
• Persons of eminence are also expected to be on the board and the Chairmanship will also be some imminent person.
Setting up of DFIs for infrastructure funding:
The Finance Minister, in her budget 2019-2020 speech, had proposed a study to set up DFIs in order to promote infrastructure funding.
The Union Minister had recalled that in the past attempts were made to set up DFI and while referring to IDBI, she added that those institutions changed the nature of their business for different reasons and the government ended up with no bank which can take a long-term risk as well as fund development.
Around 7,000 projects have been recognized under the National Infrastructure Pipeline- NIP with an investment of Rs. 111 lakh crores during the years 2020-25.
The pipeline is a first-of-its-kind initiative for providing world-class infrastructure across the country and the project will also help India in attaining a target of becoming a USD 5 trillion economy by 2025.
History of DFIs in India:
• India had DFIs in the pre-liberalized era. They were primarily engaged in the development of the industry in the country.
• In their previous forms, IDBI and ICICI were DFIs. Even India’s oldest financial institution IFCI Ltd also acted as DFI.
• In 1948, India’s first DFI was operationalized with the setting up of the Industrial Finance Corporation- IFCI.
• Subsequently, in 1955, ICICI was also set up with the backing of the World Bank.
• In 1964, the Industrial Development Bank of India- IDBI came into existence in order to promote long-term financing for infrastructure projects and industry.
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