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DEVELOPMENT FINANCE: The Indian Experience

DEVELOPMENT FINANCE: The Indian Experience. Deepak Nayyar IPD-JICA Task Force Meeting o n Industrial Policy and Transformation Jordan 5 th - 6 th June 2014. OVERVIEW. Development Banks and Industrial Finance Evolution of Development Finance Financing of Industrialization

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DEVELOPMENT FINANCE: The Indian Experience

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  1. DEVELOPMENT FINANCE: The Indian Experience Deepak Nayyar IPD-JICA Task Force Meeting on Industrial Policy and Transformation Jordan 5th - 6th June 2014

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

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

  4. 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?

  5. III. FINANCING OF INDUSTRIALIZATION • Trends in disbursements of development finance • 1970-71 to 2002-03 and 2003-04 to 2012-13 • 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

  6. Table 1Trends in Disbursements by Development Finance Institutions in India (Rs. Billions)1970-71 to 2012-13 : selected years Source: RBI, Handbook of Statistics on the Indian Economy and Report on Currency and Finance

  7. Figure ATrends in Disbursements by Development Finance Institutions in India 1970-71 to 2012-13 Source: Table 1

  8. Table 2Macroeconomic Significance of Lending by Development Finance Institutions1970-71 to 2012-13 : selected years Source: RBI and Central Statistical Organization, National Accounts Statistics, India

  9. Figure BTotal Disbursements of DFIs as a percentage of Gross Fixed Capital Formation and Value Added in the Manufacturing Sector1970-71 to 2012-13 Source: Table 2

  10. Table 3Composition of disbursements by the long-term-lending Development Finance Institutions (IFCI, ICICI and IDBI) in India1980-81 to 2002-03 (Annual Averages: in percentages) Source: IDBI, Report on Development Banking in India, various years

  11. 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

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

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