Will development finance institutions revive in India? Should they?

Abstract

Recent years have seen a resurrection of development banks worldwide. Their disbursements increased faster than those of private institutions. New national, regional and multilateral development banks were set up. FinDev in Canada (2017), Societe de Financement Local in France (2013), PT Sarana Multi Infrastruktur in Indonesia (2008) and Development Bank of Nigeria (2013) are examples of new national development banks. Some others substantially increased their capital. The Asian Infrastructure Investment Bank, a multilateral development bank with a mission to improve social and economic outcomes in Asia commenced its operations in January 2016. The New Development Bank was established in 2014 to support infrastructure and sustainable development efforts in BRICS and other emerging economies. Policy-makers and academics reassess the evaluation of these institutions. This new wave is a reaction to the more pronounced failures of capital markets following the global financial crisis. Governments recognized that lending by state-owned banks was countercyclical, it helps to mitigate adverse effects of the crisis and plays a bridging role between savings and financing needs. For a number of years now there has been intensified discussion of the need to establish a national development or long term credit bank in India. This move would open a new chapter in the eventful history of Indian development banks. There were times when they were considered essential in India’s catching up with more advanced economies. There were other times when it was believed that private sector actors could successfully take over functions from development institutions. This paper attempts to put the changes in appraisal in context and take a stand in the discussion on the establishment of a new long term finance institution in India. The second part of the paper gives a brief summary of the economic argument for development finance institutions in general. The third part deals with the hopeful start of these institutions following India's independence. The fourth part discusses the demise caused by the financial reforms of the 90s. The fifth part is devoted to conclusions, lessons and recommendations.