Birth, life and death of Development Finance Institutions in India..

Deepak Nayyar, Professor Emeritus, JNU has a piece on EPW.

This essay traces the evolution of development finance institutions in India from conception and birth, soon after independence, through infancy to adulthood and maturity, followed by a winding down at the turn of the century and closure in the early 2000s. It highlights their macroeconomic significance, and their critical role in the financing of industrialisation from the 1970s to the 1990s, to analyse the factors underlying their decline. Their contribution to the provision of industrial finance was essential and innovative. Yet, there were serious errors of omission, such as exclusion of infrastructure, and absence of coordination with industrial policy. Instead of introducing correctives, the government shut down development banks, which was the most serious error of commission. These successes and failures carry lessons for other countries, just as India has as much to learn, about the continuing importance of finance for investment in manufacturing from countries that have done better at industrialisation.

He says India actually needs to rebuild DFIs given the stress on manufacturing in India. Most manufacturing bases were built by healthy doses of finance from such DFIs. Infact with IDFC being converted into a bank now, we really have no such vehicle to fund infra projects which require long gestation funding and in huge scale. Instead of actually building IDFC into a bigger infra DFI, we have converted it into a bank whose licence could be given to some other entity.

So, in sometime we might be reinventing the wheel and creating DFIs for several purposes. And yes calling it some banking revolution/reforms..

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