Cabinet approves Bill to set up Development Finance Institution

The Union Cabinet on Tuesday approved a bill to set up a Development Finance Institution (DFI) to generate funds for investment in the infrastructure sector, as the government moves to increase spending on roads, ports and energy.

The proposed legislation will give effect to the Budget announcement made by Finance Minister Nirmala Sitharaman on February 1. The government has proposed Rs 20,000 crore to capitalise the institution.

"The Cabinet has cleared this bill, through which we will have an institution and institutional arrangement, which will help in increasing long term funds," she said after the meeting of the Cabinet.

The proposed DFI will have 50 per cent non-official directors, Sitharaman added.

In her Budget 2019-20 speech, Sitharaman had proposed a study for setting up DFIs for promoting infrastructure funding. About 7,000 projects have been identified under the National Infrastructure Pipeline (NIP) with a projected investment of a whopping Rs 111 lakh crore during 2020-25.

"During Budget, we had mentioned that we will be setting up a national bank to fund infrastructure and developmental activities. Past attempts to have alternative investment funds were taken up, but for various reasons, we ended up with no bank which could take up long-term risk (which is very high) and fund development," said Sitharaman.

She said DFI will start with 100% govt ownership and will gradually be brought down to 26%. 

"I expect the institution to raise up to Rs 3 trillion in the next few years," Sitharaman told reporters after a cabinet meeting.

The DFI would seek to raise funds from global pension and insurance sectors for investment in new projects, carrying certain tax benefits, she added.

In the last five years, India has added more than 45,000 km (28,000 miles) of national highways to link major industrial hubs, while doubling capacity at ports and adding nearly 100 GW of power generation capacity for a total of 374 GW.

It aims to cut logistics costs to about 8% of GDP from roughly 14% now, in an effort to help hundreds of companies save on transport costs and boost sales once demand picks up.