New DFI signals the huge thrust India is putting on infrastructure and its role in driving economic growth
By Deepak Sood
As promised in the Budget speech by finance minister Nirmala Sitharaman, Parliament has approved the National Bank for Financing Infrastructure and Development Bill in the just-concluded session. This approval has paved the way for establishing the NBFID that would play a significant role in executing the ambitious infrastructure pipeline involving investment of Rs 111 lakh crore.
While the NBFID would have an authorised capital of Rs 1 lakh crore, for starters, the Budget has provided Rs 5,000 crore for the rebirth of India’s Development Financial Institution (DFI). In the initial years of the country’s development after Independence, DFIs played an important role, but the system got subsumed into the universalisation of banks. Different models of financing infrastructure build-up are required in different economic environments.
Still, the past three decades of experience has thrown two main takeaways: One, India would continue to require massive investment in infrastructure (roads, railways, ports, airports, rural connectivity, building mandis with state-of-the-art logistics, and so on). Two, banks alone would not cater to critical sectors’ financing needs, and multipronged channels have to be tapped involving both public and private sectors.
The Bill, which has since become the NBFID Act, provides an all-encompassing option for raising finances for the DFI. Significantly, the law has an enabling provision for setting up more than one DFI, including in the private sector. The proposed DFI, in the form of a corporate entity, would initially be owned by the government, but would have widespread shareholding, eventually reducing the state holding to 26%. Besides the central government, multilateral institutions, sovereign wealth funds, pension funds, insurers and even banks could be roped in as investors in DFIs.
The first DFI, or the NBFID as it is called, will have borrowing options from the government, RBI, banks, mutual funds, and multilateral institutions like the World Bank and the Asian Development Bank. Given these options for raising resources, the NBFID should kick-start soon with a focus on making the best business out of infrastructure, which is the economy’s critical need. We expect some of the best brains to be joining the board of the NBFID and the senior management. The board and the top management would comprise experts from domains like sovereign wealth funds, mutual funds, multilateral funding, insurance and pension funds. Best corporate governance should be the new entity’s hallmark as we live in a world where transparency, sound disclosure norms, and a proactive approach all combine into a rewarding outcome. While the law provides for a regulatory framework for DFIs, the best standards can be institutionalised.
Given the current state of the global economy and the challenging dynamics of the Covid-19 pandemic playing into the Indian economy, we should see asset monetisation going beyond the government programme. Companies under stressed balance sheets would divest some assets bought by those willing to dive into opportunities in the brownfield. The good thing about the NBFID mandate is its scope into the brownfield as well.
The success of the first DFI in the new format would pave the way for similar future entities. After all, India remains infrastructure-starved, and the demand side of the business has significant untapped potential. This is a unique opportunity for global fund managers to bet on India’s infrastructure in their long-term portfolio. Returns in India would be far better than in the developed world. Over and above facilitating investment in the sector, the speed with which the enabling law has been brought in shows a determined and doable roadmap for opportunities in roads, carriageways, seaports, ports and airports.
Prime Minister Narendra Modi’s clear message about placing trust in the private sector is seen as a bold reform that should attract domestic and global investments. The twin-track of boosting manufacturing with schemes like the Production-Linked Incentive and facilitating investment in infrastructure should take the Indian economy on a sustained double-digit growth trajectory. That is the only way out for creating jobs and meeting the aspirations of millions of Indians.
The author is secretary general, Assocham