Cabinet approves setting up Development Finance Institution

Union Cabinet on Tuesday, March 16, 2021, approved setting up Development Finance Institution (DFI) in acknowledgement of the realization that both development and financial objectives will matter for this Institution.

DFI will be formed to generate funds for investment in the infrastructure sector, as the government moves to increase spending on roads, ports and energy.

Ministry of Finance in a tweet today said, "#Cabinet Briefing by Union Ministers Shri @PrakashJavdekar and Smt. @nsitharaman on #CabinetDecision, at 3 PM today at National Media Centre #NewDelhi."

Briefing reporters in New Delhi after the cabinet meeting, Finance Minister Nirmala Sitharaman said, the institution will help in raising the considerable amount from the market. She said, DFI will also help raise long-term funds. In the budget 2021-22, Mrs Sitharaman had announced the setting of DFI with a Capital infusion of about Rs 20,000 crore. The Minister said, the initial grant will be Rs 5,000 crore.

She said, the government is also planning to issue some securities to the Development Finance Institution, by which the cost of funds will come down.

The finance minister said, "The Cabinet has cleared this bill, through which we will have an institution and institutional arrangement, which will help in increasing long term funds." She added, "The proposed DFI will have 50 per cent, non-official directors."

In her Budget 2019-20 speech, Sitharaman had proposed a study for setting up DFIs for promoting infrastructure funding. About 7,000 projects have been identified under the National Infrastructure Pipeline (NIP) with a projected investment of a whopping Rs 111 lakh crore during 2020-25.

"During Budget, we had mentioned that we will be setting up a national bank to fund infrastructure and developmental activities. Past attempts to have alternative investment funds were taken up, but for various reasons, we ended up with no bank which could take up long-term risk (which is very high) and fund development," said Sitharaman.

She said DFI will start with 100 per cent government ownership and will gradually be brought down to 26 per cent.

"I expect the institution to raise up to Rs 3 trillion in the next few years," Sitharaman told reporters after a cabinet meeting.

The DFI would seek to raise funds from global pension and insurance sectors for investment in new projects, carrying certain tax benefits, she added.

In the last five years, India has added more than 45,000 km (28,000 miles) of national highways to link major industrial hubs, while doubling capacity at ports and adding nearly 100 GW of power generation capacity for a total of 374 GW.

It aims to cut logistics costs to about 8 per cent of GDP from roughly 14 per cent now, to help hundreds of companies save on transport costs and boost sales once demand picks up.