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Old wine, new bottle

New DFI should not just be a bailout of the old

Topics
Budget 2021 | infrastructure spending | Infrastructure funds

Business Standard Editorial Comment  |  New Delhi 

One of the important announcements in this year’s Union Budget was the government’s decision to set up a development finance institution (DFI) to steer funds towards infrastructure. This decision, though much demanded by industry, has certain major problems. The DFI structure has been tried before in India, and it succumbed broadly to the same problems that plague the public-sector banking system — directed lending, and poor risk evaluation and supervision. Yet, if the government has determined on this course, then it must at least minimise the incentive problems and seek to ensure structural soundness in the proposed institution. The finance minister, in the Budget speech, had promised that the new DFI would be professionally managed. This was interpreted by most observers to indicate it would have a large, preferably a controlling, share for the private sector and the management would be selected accordingly. The logic for a DFI has, from this view, a certain power: The government’s stake would serve to de-risk the entry into long-term infrastructure finance in India for otherwise risk-averse pools of global capital. A separately rated entity would also ensure that borrowing for infrastructure would not be held hostage to the concerns now being expressed about government debt in India.

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First Published: Tue, February 09 2021. 23:02 IST
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