The Union Budget 2021-22 of the Government of India proposed the setting up a new Development Finance Institution (DFI). In keeping with this, the Budget Session of Parliament will now consider a new bill titled
, “The National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021,” to set up a development financial institution (DFI) for the purpose of funding infrastructure projects and their entire ecosystem across their life. With the dream of achieving a 5-trillion-dollar economy by 2024 getting shattered with the onset of the COVID-19 pandemic and the consequent lockdown, the economy now needs a real “push” to catapult itself to the desired growth path at this critical juncture that is slated to be the defining moment of the Indian economy. The most important driver of such a “push” is definitely the physical capital or physical infrastructure.
The importance of DFIs in creating enabling conditions for long-term growth cannot be overemphasised. While physical capital creation through capital expenditure or capex enhances the
total factor productivity (TFP), there is
empirical evidence of physical infrastructure enhancing the overall business environment and competitiveness of an economy. The problem that essentially arises is that such physical infrastructure hardly attracts private investments due to long gestation periods, and lower returns than other projects. With the exact nature of beneficiaries often not identified properly due to the “
public goods” character of services provided by such infrastructure, it is often difficult to administer the “beneficiaries pay” principle either. It is here that the role of a DFI becomes important. A DFI provides long-term finances for infrastructure projects of critical significance that may or may not conform to the existing standards of market returns. As the DFIs provide loans at low and constant rates of interest for social benefits, they are different from commercial banks, which need to satisfy their own bottom-line objectives through mobilisation of short-term to medium-term deposits, and lend for similar periods to avert maturity mismatch as an important component of their own risk management.
The importance of DFIs in creating enabling conditions for long-term growth cannot be overemphasised.
It is not that India is new to DFIs, rather, India had many such DFIs working on satisfying the needs for infrastructure, industry, and agricultural finance. The Industrial Finance Corporation of India (IFCI) was the first DFI set up after independence in 1948, followed by
IDBI in 1964,
IIBI in 1972,
NABARD and
EXIM Bank in 1982,
SIDBI in 1990 and many others. Over the past 25 years, ICICI, IDBI and IDFC were transformed into commercial banks from DFIs, while NABARD, EXIM Bank, SIDBI, REC, etc. provide sector-specific investments.
Therefore, at this juncture, the need for an institution to provide for capital expenditure (capex) for the infrastructure spree that the nation intends to indulge in is supreme. But, the role of a DFI is different in the 21
st century than what had prevailed earlier. A DFI cannot think of unbridled infrastructure funding only from the perspective of economic growth. Rather, in accordance with the workings of other international DFIs like the World Bank, Asian Development Bank, and the European Bank for Reconstruction and Development, the proposed DFI should imbibe some of the better practices and norms that conform to the broader developmental objectives, namely, the UN Sustainable Development Goals (SDGs).
A DFI cannot think of unbridled infrastructure funding only from the perspective of economic growth.
At the very outset, it may be stated that the proposed DFI must imbibe the principles of economic efficiency, social equity, and environmental and developmental sustainability in its financing mode. Earlier, unbridled and unthoughtful infrastructure development in India and in many parts of the developing and developed world has resulted in social conflicts, particularly on displacement and rehabilitation, and environmental degradation. Development-induced displacement and lack of rehabilitation have been social stressors and add to “social costs” of the infrastructure, but they never appear in the cost-benefit matrix of the infrastructure projects. According to a
2011 IIT Roorkee paper, while around 50 million people were displaced due to development projects in over 50 years in India, around 21.3 million of the internally displaced people (or IDPs) include those displaced by dams (16.4 million),mines (2.55 million), industrial development (1.25 million) and wild life sanctuaries and national parks (0.6 million). This implies that rehabilitation has been improper, thereby, leading to decline in social cohesion, rise in social conflicts, and rise in long-term social costs. This is undoubtedly an “
externality” that should be internalised in the project cost. At times, it becomes difficult to monetise these elements, though some conservative estimate or even an “underestimate” might help in rationalising the project under consideration.
The other critical element arises in the form of environmental cost. Any infrastructure development that infringes into the working of the natural ecosystem is not only detrimental to the ecosystem, but in the long-run proves detrimental to the human community. This is because of the loss in ecosystem services — the benefits offered by the natural ecosystem to the human community free of cost. To assess these benefits, there are mechanisms to place monetary values to these ecosystem services through the avoided cost or other approaches. As an example, if a forest stores carbon and helps in combatting global warming, then the destruction of the forest will result in release of carbon, thereby, imposing the making society incur various social costs of increased health costs, productivity losses, etc. Similarly, a dam construction might inhibit fish movements, thereby, resulting in loss of livelihoods for downstream fishermen community. All these social costs resulting from losses in ecosystem services can be monetised through valuation of ecosystem services.
Any infrastructure development that infringes into the working of the natural ecosystem is not only detrimental to the ecosystem, but in the long-run proves detrimental to the human community.
Therefore, a new set of equations needs to be devised by the DFI for their own decision support system (DSS) so that their infrastructure financing decisions result in socially and ecologically optimal solutions over time and space. This should be the essence of good economics! This can be made possible if the DSS consists of the criterion of the net benefit (benefits minus costs) stream across the total plan period by incorporating various costs and benefits over time and space. This is an international best practice, but hardly followed in India! There is no doubt that incorporation of such criterion may either increase the gestation periods of projects or result in a decline in rates of return, or may even make certain projects unviable. But, turning a blind eye to these costs is a folly committed by various dispensations across the world in the last century. The futility of their physical capital development decisions on grounds of sustainability criteria were realised much later, and at times when the damage was irreversible!
The mark of a developed nation should not be sought in terms of achieving a desired figure of per capita GDP, but in terms of a desired level of economic and social progress measured through holistic developmental indicators like an SDG index. Hence, the expectation and responsibility of the proposed DFI is huge: To reconcile between the irreconcilable trinity of equity, efficiency and sustainability!
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