DEVELOPMENT FINANCE: The Indian Experience Deepak Nayyar IPD-JICA Task Force Meeting on Industrial Policy and Transformation Jordan 5 th - 6 th June

OVERVIEW Development Banks and Industrial Finance Evolution of Development Finance Financing of Industrialization Assessment of Performance Lessons from the Experience 2

I. DEVELOPMENT BANKS AND INDUSTRIAL FINANCE The economic logic The experience of late industrializers The rationale in India 3

II. EVOLUTION OF DEVELOPMENT FINANCE The first phase: late 1940s to mid-1960s Long-term-lending institutions: IFCI, ICICI and IDBI Institutions for the States: SFCs and SIDCs Investment institutions: LIC, UTI and GIC The second phase: the 1980s Refinancing institutions: NABARD, NHB and SIDBI Sector-specific/Specialized institutions: HUDCO, EXIM Bank, REC, PFC, IRFC et al The third phase: late 1990s to early 2000s Impact of financial sector reforms Some new institutions: IDFC and IIFCL What remains of development banking? 4

III. FINANCING OF INDUSTRIALIZATION Trends in disbursements of development finance to and to Factors underlying the decline and fall of long-term-lending institutions Macroeconomic significance of lending by DFIs Gross fixed capital formation in manufacturing Value added in manufacturing Sectoral distribution of disbursements Long-term-lending institutions Sector-specific or specialized institutions Sources of industrial finance since the early 2000s 5

Table 1 Trends in Disbursements by Development Finance Institutions in India (Rs. Billions) to : selected years YearIFCIICICIIDBISIDBILIC, GIC and UTI SFCs and SIDCs Total Source: RBI, Handbook of Statistics on the Indian Economy and Report on Currency and Finance 6

Figure A Trends in Disbursements by Development Finance Institutions in India to Source: Table 1 7

Table 2 Macroeconomic Significance of Lending by Development Finance Institutions to : selected years Year Total Disbursements as a percentage of GFCF in Manufacturing Sector (percentage) Value Added in Manufacturing Sector (percentage) Source: RBI and Central Statistical Organization, National Accounts Statistics, India 8

Figure B Total Disbursements of DFIs as a percentage of Gross Fixed Capital Formation and Value Added in the Manufacturing Sector to Source: Table 2 9

Table 3 Composition of disbursements by the long-term-lending Development Finance Institutions (IFCI, ICICI and IDBI) in India to (Annual Averages: in percentages) Industry to to to to to Resource base manufacturing Chemicals, fertilizers and pharmaceuticals Refineries and Oil Cement Metal and metal manufacturing Machinery and Transport Equipment Infrastructure Services Other industries Total Above Total disbursements in Rs. billion (95.5)(247.9)(619.3)(1704.8)(701.5) Source: IDBI, Report on Development Banking in India, various years 10

IV. ASSESSMENT OF PERFORMANCE Contribution to provision of industrial finance Complex structure of financial institutions Sectoral allocation of development finance Engagement with borrowing firms beyond lending 11

V. LESSONS FROM THE EXPERIENCE Development finance: a necessary condition Financial institutions: nature and support Some correctives: learning from mistakes Missing control mechanisms 12