By Nagesh Kumar & Santosh Das, respectively Director and Assistant Professor, Institute for Studies in Industrial Development
Recognising the critical role of the manufacturing sector to realise the 2047 vision through the creation of decent jobs and incomes, the government has, over the past decade, taken several reforms and initiatives—including Make in India, the performance-linked incentive scheme, lowering of tax rates, and the announcement of a new manufacturing mission in the last Budget—to foster it. While there are several notable successes, mobile handset making being the most visible one, private investments in the manufacturing sector continue to underperform.
Access to affordable credit, especially term lending, is critical for industrial development. That specialised development finance institutions (DFIs) have played an important role in key industrialised countries to address the term-lending needs of their industrial sectors—e.g. Germany (with KfW), Japan (JDB and IBJ), Brazil (BNDES), South Korea (KDB), and China (CDB) —is well documented.
In India, a trinity of DFIs—namely the Industrial Finance Corporation of India, the Industrial Development Bank of India, and the Industrial Credit and Investment Corporation of India—were established by the government in the early post-Independence period to support industrialisation, which they did. However, as part of the financial sector reforms in the 1990s, they were converted into commercial banks.
Since the turn of the century, industrial credit has been primarily provided by commercial banks, especially public sector banks (PSBs), for both short- and long-term investment requirements. The share of debentures and bonds has stagnated between 12% and 14% of corporate financing. The corporate bond market, which is a major source of long-term finance for industry worldwide, has failed to develop in India despite decades of reforms, lacking both depth and scale. Many companies and start-ups are raising capital through initial public offerings (IPOs) in recent times. However, IPOs are relevant options after the enterprise has been well established in the market for some years.
The Institute for Studies in Industrial Development’s (ISID) India Industrial Development Report (IIDR) 2024-25, on the basis of enterprise surveys, finds that access to finance remains a constraint in the country, especially for small and medium firms across all manufacturing sectors. A substantial proportion (over 62%) of medium firms rely on commercial banks to finance investments. While commercial banks can serve the requirements for working capital well, they remain ill-equipped for term lending due to asset-liability mismatches, given that the bulk of their borrowings comes from short-term deposits. Commercial banks also lack the technical expertise and skills required for effective project and risk assessments within the industrial sector. This deficiency has led to a high incidence of loan defaults and the accumulation of non-performing assets, particularly among PSBs.
To achieve the ambitious Viksit Bharat Vision for 2047, India’s GDP will need to grow at an average rate of 7-8%, requiring the manufacturing sector to expand by 9-10% annually for the next 22 years. This rapid pace of industrial growth would require gross fixed capital formation to increase gradually from around 31% to approximately 38% of GDP. The industrial credit requirements to sustain this scale of investments would be staggering and cannot be supported by the existing institutional structure.
To catalyse the necessary investments in the manufacturing sector, the IIDR proposed the creation of a new DFI for term lending to the industrial sector, alongside efforts to strengthen the corporate bond market. Modelled along the lines of the National Bank for Financing Infrastructure and Development (NaBFID) established in 2021, as a specialised DFI under the Reserve Bank of India’s supervision, it could be named the National Industrial Development Bank of India (NIDBI).
NIDBI could support industrialisation by addressing gaps in the current industrial financing system in alignment with national priorities. It should be a well-capitalised, professionally managed institution dedicated to supporting manufacturing investments through lending programmes and technical advisory services. NIDBI’s authorised capital could be `1 lakh crore, of which 20% or `20,000 crore could be paid-up initially, contributed by the government, domestic long-term institutional investors, and multilateral financial institutions. Its shareholder profile would allow it to leverage several times its paid-up capital, through bond issuance in both domestic and overseas markets or credit lines from multilateral institutions.
NIDBI could prioritise manufacturing projects under Make in India for its lending programmes in tune with national priorities, focusing on sectors and projects that address market failures or create new opportunities, such as socially relevant and ecologically sustainable initiatives. Potential projects could include green hydrogen, solar panel manufacturing, wind turbines, electric vehicles (EV), EV batteries, semiconductor making, among other projects, besides job-creating value chains.
NIDBI should develop specialised expertise in project appraisal, risk management, and impact assessment while remaining responsive to global trends. A robust project appraisal and risk management system, along with transparent and sound corporate governance, would be essential for NIDBI. As a catalyst for manufacturing development, NIDBI should provide advisory services to investors, design structured term loan facilities tailored to project needs, and issue guarantees or letters of credit as required. It would also monitor global trends and adjust its strategies to align with national requirements.
To sum up, carrying forward the strong momentum built over the past decade to foster the manufacturing sector, the finance minister could give a further push by plugging an important gap in the institutional architecture by creating a new DFI in her next Budget.
Views are personal