Decoding the recent DFI introduction in Indian Infrastructure

One of the key announcements of budget 2021 was setting up of Development Finance Institutions (DFI) to act as a catalyst and enabler for infrastructure financing. Within 1.5 months of budget announcement the government has cleared a bill to set up a government-owned development finance institution (DFI) with initial paid-up capital of Rs 20,000 crore so that it can leverage around Rs 3 trillion from the markets in a few years to provide long-term funds to infrastructure projects as well as for development requirements of the country. The government will provide a five-year income tax holiday to private sector development finance institutions (DFIs) to build a robust system for funding infrastructure. They will join a state-owned DFI that’s being set up.

Unsuccessful attempts at DFI introductions have been made in the past; however the government is keen to ensure that DFIs succeed this time around, given the need for such funding, by putting in place a facilitative framework. DFI will also support credit enhancement mechanisms, provide project development and monitoring, and help develop the bond market, thereby nurturing the overall infrastructure financing ecosystem

• Are the tax benefits provided in the bill adequate to attract investor interest?

• Government owned DFI v/s Private DFIs?

• Which past mistakes should the government avoid this time around?

• Which parameters will  ensure DFI implementation will be successful this time around?