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World Bank approves $750 mn loan to India to catalyze private financing and support economic growth

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The World Bank Board of Executive Directors approved a $750 million development policy loan (DPL) to the Government of India (GoI) today to support critical reforms to address financing gaps by leveraging private sector investment in infrastructure, small businesses, and green finance markets.

The World Bank Research Observer | Oxford Academic

Over the last decade, the GoI has taken a number of steps to improve financial inclusion, as well as the stability of the financial sector and domestic capital markets, as part of its ambitious sustainable growth goals. As a result, the sector has become more efficient and resilient in the face of the COVID-19 crisis and other external shocks.

Despite this progress, the demand for public resources and financing for critical sectors of the economy remains high. The annual finance gap for infrastructure and micro, small, and medium enterprises (MSMEs) is estimated to be 4% of GDP and Rs.18-25 trillion. Furthermore, according to World Bank estimates, the energy transition required to meet the government's COP26 commitments will necessitate an annual cumulative investment of 1.5 percent of GDP.

"An efficient financial system capable of meeting the country's investment needs is critical to supporting India's recovery from the pandemic and realising its ambitious sustainable growth targets," said Hideki Mori, Acting Country Director for India at the World Bank. "By leveraging private resources to support the country's development goals, this operation aims to relieve pressure on public finances."

The key reforms supported by the DPL include:

Long-term private sector financing is being catalysed. The operation will assist in the establishment of a new Infrastructure Development Financial Institution that will leverage long-term private sector finance; crowd in private financing for infrastructure through asset monetization; and connect housing finance lenders to capital markets through securitization.

Green finance markets are being developed. The operation encourages the issuance of the country's first sovereign green bonds as well as the development of a national carbon market to promote low-carbon alternatives.

Improving credit access for MSMEs and female entrepreneurs. The operation promotes the strengthening of key MSME credit guarantee schemes in order to ensure continued access to the sectors most impacted by COVID-19, as well as improving access to credit for women borrowers through de-risking mechanisms. "With India being highly vulnerable to the effects of climate change, both public and private sector finance must be mobilised to support the economy's transition to a more sustainable and resilient growth model," said Team Task Leaders and Lead Financial Sector Specialists Mehnaz S. Safavian and Alexander Pankov. "The development of new instruments for mobilising funding for climate adaptation and mitigation goals will contribute to the country's long-term growth goals."

The International Bank for Reconstruction and Development (IBRD) will lend $667 million of the $750 million commitment, while the International Development Association (IDA), the World Bank's concessionary lending arm, will lend $83 million.

BNE News Desk