After making an announcement about the same in this year’s Budget, the government has approved an initial paid-up capital of Rs 20,000 crore for setting up the Development Finance Institution (DFI). In the next few years, the institution plans to raise more than Rs 3 lakh crore for financing infrastructure projects in India.
DFIs are seeing a kind of revival in a lot of developing countries like India. They have a critical role to play in an economy like ours since they don’t operate with the sole objective of maximising profits. They try as much to meet development objectives as make profits. At a time when India aims to become a $5- trillion economy, there is an ardent need for an institution that will mobilise long-term fiscal resources for socially desirable works and projects with high social returns.
The DFI is set to get operational at a time when plans of massive up-grade of the existing facilities and launch of new infra projects are suffering on account of the banking crisis that started in 2019.
The Bharatmala scheme of the government for construction of highways, economic corridors and broader roads, for example, requires funfing to the tune of Rs 5.35 lakh crore. The Jal Jeevan Mission to provide piped water to about 16 crore Indian households will cost another Rs 3.5 lakh crore. The quantum of outlay on ports, airports and mass transit systems will be even higher.
The proposal to have professional and industry veterans in running the DFI is also practical. The government took a similar decision to have professionals and industry experts to run the Special Window for Completion of Construction of Affordable and Mid-Income Housing Projects’ (SWAMIH) fund which is doing well so far.
The timing of this move could not have been better since global wealth funds, including many sovereign funds, are eyeing developing countries for investment.
However, the government has to simultaneously lay the ground for the DFI to be a success which includes significantly faster regulatory approvals for the projects and also helping the infrastructure company/special purpose vehicle in the land acquisition process.
Revisiting the idea of institutional framework would be a crucial step to ensure the upcoming institutions can avoid the pitfalls previously witnessed by institutions established with the same intent.
One way to ensure that would be to put in place a mechanism for faster clearances of infrastructure projects, invariably subjected to considerable delays.
Faster completion of projects
Another critical factor for the success of the DFIs in the country is speedier completion of the projects itself. Infra projects in the country tend to get delayed, severely diminishing the chances of their monetary success while also compromising the promise they initially show. A recent government report places the number of delayed infrastructure projects at a staggering 539; about 448 of them have cost overruns of a mammoth Rs 4 lakh crore.
Infrastructure projects are long-gestation projects; time and cost overruns make these even more unattractive from the point of view of fiscal break even.
Another measure that the government must put in place is to introduce necessary reforms in the bonds market, which is currently prone to a number of inefficiencies and weaknesses.
If the international wealth funds were to depend on the bond markets in India in the long run, or the DFI being promulgated by the government was lean on bond markets eventually, the scenario will again arise where the yields from bonds will be insufficient to fund the high-risk infrastructure projects. One reason for the DFIs of the 1940s, 1950s and right up till 1980s to come under stress was weakness in the bond markets.
-Author Mani Rangarajan is Group COO of Housing.com, Makaan.com and Proptiger.com