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DEVELOPMENT FINANCE: The Indian Experience

Explore the evolution of development finance in India, from development banks to specialized institutions, assessing their performance and examining industrial financing trends. Gain insights into lessons learned and the importance of financial institutions in driving 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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