WASHINGTON, June 29, 2022-The World Bank Board of Executive Directors today approved a $750 million development policy loan (DPL) to the Government of India (GoI) to support reforms critical to addressing financing gaps by leveraging private sector investment in infrastructure, small businesses, and the green finance markets.
Over the past decade and as part of its ambitious sustainable growth goals, the GoI has taken several measures to improve financial inclusion as well as the stability of the financial sector and the domestic capital markets. This has resulted in a more efficient and resilient sector in the face of the COVID-19 crisis and other external shocks.
Despite this progress, pressure on public resources and financing needs for key sectors of the economy remain high. For infrastructure and micro, small and medium enterprises (MSMEs) the annual finance gap is estimated at 4 percent of GDP and between Rs.18-25 trillion[1], respectively. In addition, World Bank estimates show that the energy transition required to meet the government’s COP26 commitments will require an annual cumulative investment of 1.5 percent of GDP.
“An efficient financial system capable of meeting the country’s investment needs is key to support India’s rebound from the pandemic and to realize its ambitious sustainable growth targets,” said Hideki Mori, the World Bank’s Acting Country Director for India. “This operation aims to reduce the pressure on public finances by leveraging private resources to support the country’s development goals.”
The key reforms supported by the DPL include:
- Catalyzing long-term private sector finance. The operation will help establish a new Development Financial Institution for infrastructure that will leverage long-term finance from the private sector; crowd in private financing for infrastructure through asset monetization, and link housing finance lenders to capital markets through securitization.
- Developing the markets for green finance. The operation supports issuing the country’s first sovereign green bonds and developing a national carbon market to promote low-carbon alternatives.
- Improving access to credit for MSMEs and women entrepreneurs. The operation supports strengthening key MSME credit guarantee schemes to ensure continued access to sectors most affected by COVID-19 as well as improving access to credit for women borrowers through de-risking mechanisms.
“With India being highly vulnerable to impacts from climate change, both public and private sector finance need to be mobilized to support the economy’s transition to a more sustainable and resilient growth model,” said Mehnaz S. Safavian and Alexander Pankov, Team Task Leaders and Lead Financial Sector Specialists. “The creation of new instruments for mobilizing funding for climate adaptation and mitigation objectives will contribute towards the country’s sustainable growth targets.”
Of the $750 million commitment, $667 million will be will be a loan from the International Bank for Reconstruction and Development (IBRD), and $83 million will be financed by a credit from the International Development Association (IDA), the World Bank’s concessionary lending arm. The loan and credit will be on IBRD terms and IDA non-concessional terms, respectively, with a final maturity of 18.5 years, including a grace period of 5 years.
[1] Financing India’s MSMEs: Estimation of Debt Requirement of MSMEs in India, IFC, 2018