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State PCS

Mains Practice Questions

  • Q. Development Financial Institutions (DFIs) are critical intermediaries for channeling long-term finance required for infrastructure and realizing higher economic growth. Discuss.

    05 Jul, 2021 GS Paper 3 Economy

    Approach

    • Start the answer by briefly introducing the background & functioning of Development Financial Institutions (DFIs).
    • Discuss the importance of DFIs India.
    • Conclude Suitably.

    Introduction

    Development financial institutions provide long-term credit for capital-intensive investments spread over a long period and low yielding rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.

    In India various DFI existed in the pre-1991 era, but they were converted into banks after the recommendation of the Narshiman committee (1991-92). However, given the infrastructure deficit in India, there is a need to revive the DFIs.

    Body

    Importance of DFIs India

    • Infrastructure Building: Inadequate and inefficient infrastructure leads to high transaction costs, which in turn stunts an economy’s growth potential.
      • Therefore, DFIs makes sense as the Centre government envisages mobilizing nearly ?100 lakh crore for the ambitious National Infrastructure Pipeline.
    • Lack of Finance for Infrastructure: Although India has a long-term debt market for the government securities and corporate bonds cut, it is still out of reach of retail investors and unable to meet the large infrastructure financing needs.
    • Economic Crisis Triggered By Covid-19 Pandemic: The Covid-19 pandemic has exacerbated inequality, the poverty gap, unemployment, and the economy’s slowing down.
      • Thus, infrastructure building through DFIs can help in quick economic recovery.
    • International Precedent: Irrespective of the level of development, countries across the world have set up development banks to finance key infrastructure and manufacturing projects.
      • For instance, the European Investment Bank (EIB) acts like a DFI for Europe.

    Conclusion

    For a developing country like India, it is desirable that the new DFI remains viable and sustainable to be able to cater to the long-term development financing requirements.

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