The creation of a mega Development Finance Institution (DFI) is likely to be announced in the Union Budget. The institution is expected to be created by merging some existing financial institutions to meet the long-term financing needs of new, stalled, and work-in-progress infrastructure projects worth over 100 lakh crore, people aware of the matter said.

A large DFI is necessary for rapid infrastructure development and is likely to be one of the key focus areas of Budget 2021-22.

Infrastructure development will put India on a higher growth trajectory and impact every sector of the economy, the people cited above added, requesting anonymity.

Union finance minister Nirmala Sitharaman will on February 1 present the Budget, which is expected to be focussed on reviving the economy hit hard by the Covid-19 pandemic and the 68-day-long nationwide lockdown imposed from March 25 to check its spread.

The Indian economy contracted by 23.9% in the quarter that ended on June 30. It recovered to contract by 7.5% in the three months that ended on September 30. According to the first advanced estimate by the National Statistical Office, GDP is expected to contract by 7.7% in fiscal 2020-21.

There is a need for a mega DFI as commercial banks are not suited for long-term financing of infrastructure projects with long gestation periods, the people cited above said. They added that apart from funding new projects, such an institution could also help revive stalled projects worth at least 10 lakh crores. “Most of these projects are languishing because of fund crunch,” one of the persons said.

The proposed mega DFI may include an existing financial institution and some existing funds. “It will meet the long-term financing need of these projects,” the person said. “The government has already announced its ambitious 111 lakh crore National Infrastructure Pipeline, which will require debt financing of at least 60-70 lakh crore in the next four-five years.”

A second person said although the government has created several funds to finance infrastructure and revive stressed projects, the idea of having a mega DFI is to create a competitive financing option.

The Cabinet on November 25 approved a 6,000 crore capital infusion in National Investment and Infrastructure Fund, a government-backed entity created to provide long-term capital to the infrastructure sector.

The government also set up 25,000 crore Special Window for Affordable and Mid-Income Housing Fund on November 6, 2019, to help stalled projects in the real estate sector.

Niranjan Hiranandani, president of the National Real Estate Development Council, said the creation of the fund for the stressed real estate sector was appreciable, but not sufficient as the funds required to complete these projects is in access to 1.25 lakh crore.

Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP, said funding is the most important aspect of infrastructure projects.

“Banks are reeling under the piled-up NPAs [non-performing assets] and in addition to this, funding of greenfield projects by commercial banks leads to asset-liability mismatch which already has left a lasting impact. The government does not have fiscal room to spend. The issues clearly indicate the necessity for a DFI for infrastructure development.”