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Birth, Life and Death of Development Finance Institutions in India
This essay traces the evolution of development finance institutions in India from conception and birth, soon after independence, through infancy to adulthood and maturity, followed by a winding down at the turn of the century and closure in the early 2000s. It highlights their macroeconomic significance, and their critical role in the financing of industrialisation from the 1970s to the 1990s, to analyse the factors underlying their decline. Their contribution to the provision of industrial finance was essential and innovative. Yet, there were serious errors of omission, such as exclusion of infrastructure, and absence of coordination with industrial policy. Instead of introducing correctives, the government shut down development banks, which was the most serious error of commission. These successes and failures carry lessons for other countries, just as India has as much to learn, about the continuing importance of finance for investment in manufacturing from countries that have done better at industrialisation.
This article is a shorter version of the contribution to a forthcoming book edited by Akbar Noman and Joseph Stiglitz, to be published by Columbia University Press, New York. It was written for the IPD–JICA Task Force on Industrial Policy. I would like to thank participants in the IPD–JICA Workshops at the Dead Sea in Jordan in June 2014, and at Columbia University in New York in February 2015, for perceptive questions and helpful comments. I would also like to thank Atul Sanganeria for valuable research assistance.
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