Development Financing for Skill Enhancement in India

Saurav Kumar Das December, 2015

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Overview of Development Financial Institutions (DFIs)

DFIs are financial agencies that provide medium and long-term financial assistance and engaged in promotion and development of industry, agriculture and other key sectors.

Eg: World Bank & International Monetary Fund (IMF)

DFIs in India: Industrial Finance Corporation of India Ltd. (IFCI) Industrial Development Bank of India (IDBI) Industrial Investment Bank of India Ltd. (IIBI) Small Industrial Development Bank of India (SIDBI) Export Import Bank of India (EXIM) National Bank For Agriculture & Rural Development (NABARD)

DFIs are however, now converting themselves into Universal Banks mainly affected by ‘Cost of Resources’

The World Bank had in late 1980s observed: ‘DFIs have no future’

One stop shop of financial products & services – everything from term finance, working capital, project advisory services etc. Encompassing commercial banking and investment banking, including investment in equities and project finance.

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History & Evolution of DFIs in India

The initial periods of development in India were marked by balance of payments difficulties and the shortage of foreign exchange resources. Planners had to rely on external assistance to make available adequate supplies of foreign exchange for supplementing the existing investible resources in the country.

External assistance was received from various countries and international institutions

in the form of equipment' and commodities, technical assistance in the form of the services of experts and training facilities. Assistance came as loans, grants and deferred payment facilities

The Indian economy today is no longer reliant on external assistance for the financing of its plan outlays or for gross capital formation. The change is evident from the changing pattern of external assistance. The reliance on food aid has been done away with and the economy has matured sufficiently to move away from the compulsions of accepting tied aid.

External assistance today plays more of a supportive role in financing major infrastructure projects, social sector projects and in building up the institutional capacity.

Accordingly, the policy on external assistance has been recast to affirm this changing role of external assistance and to emphasize the reform orientation in India’s economic policy.

Nature of Developmental assistance in Initial Years of

Planning

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Major Multilateral Donors in India ASIAN DEVELOPMENT BANK (ADB) The ADB is a major regional financial institution and India’s

subscription to the Bank’s capital stock is the fourth largest of all member countries after Japan, the USA and the People’s

Republic of China. Although eligible to borrow under the criteria laid down by the ADB, India voluntarily refrained from borrowing initially. However, in order to broad base its resources, it was decided to commence borrowing from ADB in 1986.

The major areas of lending by the Bank include the following sectors:

1) Transport & Communications 2) Energy 3) Financial 4) Multi-sector projects 5) Industry and non fuel minerals 6) Social Infrastructure, and 7) Irrigation.

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Major Multilateral Donors in India

INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA): IDA, the soft loan affiliate of the World Bank, depends largely on

contributions made from time to time by the wealthier member countries for its financial resources and on repayments received from earlier credits. IDA assistance to India began in June 1961 and has since then been an important component of external assistance programme

IDA commitments, which are known as “Credits”, presently have a 10 years grace period and are to be repaid over 35 years. The credits to India approved up to 30.06.1987 are repayable in 50 years, inclusive of a grace period of 10 years, and those approved after 01.07.1987 are repayable in 35 years inclusive of a grace period of 10 years. IDA credits carry no interest charge but a service charge of 0.75% per annum is levied on the amount disbursed. Further, there is an annual commitment charge of up to 0.5% per annum on the un-disbursed balance

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Major Multilateral Donors in India IFAD: The International Fund for Agricultural Development (IFAD)

was set up in 1977 to finance agricultural development projects primarily for the expansion of food production in developing countries.

163 countries are members of IFAD and they are grouped in three lists:

List A: Developed countries List B: Oil producing countries List C: Developing countries India has been re-elected to the Executive Board of IFAD for the

period 2006-2008 IFAD loans are repayable over a period of 40 years including a

grace period of 10 years and carry no interest charges. However, a service charge at the rate of 0.75% per annum is

levied on the loan amount withdrawn and outstanding.

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Role of DEA in India

Department of Economic Affairs (DEA): One of the major functions of the Department of Economic

Affairs is to access external assistance from all multilateral as well as bilateral partners. It is well known that, during the last 50 years or so, India has been amongst the most important countries receiving external development assistance. Our endeavor has always been to attract and utilize assistance within the parameters of our national policies and priorities, so that it complements the efforts of the Government of India in achieving its objectives

There is little doubt that the foreign assistance received by us has played a vital role in the provision of public goods and in meeting our infrastructure needs. The programs have benefitted the country not only through the provision of additional resources but also by the sharing of best practices and transfer of skills and knowledge from the developed countries

As per the extant policy, Government of India does not accept aid in areas where it has substantial control

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Role of DEA in India

Department of Economic Affairs (DEA) in the Ministry of Finance acts as nodal Department for all matters relating to:

i. Loans, credits and grants from foreign countries, special agencies, nongovernmental

foundations agencies and voluntary bodies; ii. Loans, credits and grants from multilateral agencies; iii. Technical and Economic assistance received by India as

under: a. The United Nations Technical Assistance Administration

Programmes. b. Ad-hoc offers of technical assistance from various foreign

countries, special agencies, non-Government entities. c. United Nations Office of Project Services iv. Technical assistance received by India from or given to

foreign governments, international institutions and organizations, except such as are relatable to subjects allocated to any other Department.

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Official Development Assistance Official flows from foreign governments is defined as Official Development

Assistance (ODA) by the OECD if it has a grant element of at least 25%,

calculated against a notional reference rate of 10 percent per annum.

As the long-term interest rates in most donor countries are now below 10 percent, and therefore attaining 25 percent grant element level has become easier.

Therefore, as per the OECD, to qualify as ODA, loans must still be concessional in character, i.e., below market interest rates.

The discount rate of 10 percent for the calculation of the grant element is used

irrespective of the country of origin of ODA. As the discount rate used in the

calculation of the grant element is not the interest rate at which ODA is given by

the donor country, it does not really give a correct idea about the concessionality.

The difference in the interest rate on ODA and interest rate on commercial

borrowing for the same tenor and currency, i.e., savings in the interest rate compared to the commercial borrowings, would give a better idea of the concessionality of ODA.

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Sources of Bilateral Development Assistance

Government Projects: The projects and programmes where the external funds are being

routed through the Consolidated Fund of India are classified as “Government Projects”. These include projects implemented by Central Government and State Governments.

Government of India acts as borrower/recipient in all such cases and all financial obligations for repayment of loans and interest payments to external funding agencies are met by the DEA through AAAD done by concerned borrower.

Non-Government Projects: Under the extant guidelines, Central Public Enterprises and

Financial Institutions, receive external assistance directly from the multilateral or bilateral source. Concerned Central Public Enterprise/Financial Institution acts as borrower in such cases and

Government of India provides sovereign guarantee where required. Such projects are classified as “Non-government Projects” and all repayments of loans and interests to external funding agencies in such cases are directly

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Types of Bilateral Development Assistance

Project Finance: Project Finance is utilized to finance specific purpose such as

construction or maintenance of roads, power plants, irrigation, water supply and sewerage facilities. The bilateral development assistance is used for the procurement of facilities, equipment and services, or for implementing civil works and other related works. Sometimes project finance is utilized for engineering services also at planning and appraisal stages of the projects. The activities in such cases include reviews of feasibility studies, detailed designing and preparation of bidding documents.

Sector Programme Finance: Bilateral development assistance is provided to support

development policies and institutional reforms in a specific prioritized sector, as in the education sector. Programme finance is channeled as budget support, uses local accounting systems and may not be linked to specific project activities.

Generally, conditionalities and milestones are set for measuring the performance of the programmes and the bilateral development assistance is disbursed in tranches as milestones are achieved and conditionalities are fulfilled. Components requiring capital expenditure are also sometimes included in such programmes

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Types of Bilateral Development Assistance

Financial Intermediary Loans (Lines of credit): Financial intermediary loans are provided to the financial institutions

like SIDBI, NABARD, etc. for the implementation of selected activities, such as the promotion of small and medium-scale enterprises in manufacturing; promotion of self-help groups in agriculture, watershed development; and promotion of usage of alternative sources of energy. These loans act as ‘two-step loans’ because the fund utilization process involves two or more steps for channeling the funds to the end-beneficiaries who could be in the private sector.

Technical Cooperation: External agencies implement technical cooperation programmes for

enhancing the abilities of individuals, groups, institutions and organizations through capacity development. Grants and normally take the following forms:

i. Consultancy services to carry out any activity related to development;

ii. Organizational reinforcement through provision of management and other operational or advisory personnel;

iii. Provision of advisers in policy analysis and formulation; iv. Training; v. Research and studies, including feasibility studies for capital

projects; vi. Assistance for implementation of capital projects in the form of accompanying measures

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Development Financing of Skill Development Initiatives in India

India has gradually evolved as a knowledge-based economy due to the abundance of capable, flexible and qualified human capital. With the constantly rising influence of globalization, India has immense opportunities to establish its distinctive position in the world. However, there is a need to further develop and empower the

human capital to ensure the nation’s global competiveness. Despite the emphatic stress laid on education and training in

this country, there is still a shortage of skilled manpower to address the mounting needs and demands of the economy.

As an immediate necessity that has urgently arisen from the current scenario, the government is dedicatedly striving to initiate and achieve formal/informal skill development of the working population via education/vocational education/skill training and other upcoming learning methods

Skill development is one of the priority agendas of the government for the Twelfth Five Year Plan of the Govt. of India. The government plans to set up sector skill councils to prepare standards required for training programs. The industries are also proactively taking steps to partner with the government and reduce the skill gap.

Financial support: The government has doubled the allocation of funds for skill development under the

National Skill Development Fund (NSDF) by INR10 billion in the Union Budget 2012–13. The total corpus of funds has been increased to INR25 billion.

Infrastructure support: The various ministries have created infrastructure for skill development such as ITIs,

polytechnics, community polytechnics, secondary schools (in association with private sector). Some of the key initiatives of the government are as follows:

Establishment of new ITIs in underserved regions and the existing ITIs being upgraded to centers of excellence to produce multi-skilled workforce of world standards

MoUs with states and it is defining outcomes and reforms and imposing an obligation to transfer autonomy to PPP

Setting up more polytechnics in the PPP mode and 400 government polytechnics being upgraded

Expansion of vocational education from 9,500 senior secondary schools to 20,000 schools; intake capacity to increase from 1 million to 2.5 million

Government focus on Skill Development

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Private Sector Initiatives B-Able: A subsidiary (100%) of BASIX, a micro finance institution (MFI)

promoted by industry professionals Key focus on technology enablement in targeted sectors such as

construction, tourism, banking, rural farm, hospitality and food Processing

Targeted at school dropouts and socially unprivileged classes NIIT: Leading global talent development corporation focused on building a skilled manpower pool Provides training and training solutions in information technology,

business process outsourcing, banking, finance and insurance, executive management education, and communication and professional life skills. Owns a total of 1,575 centers in locations across India)

IL&FS: Associated with education and skills training for the past 15 years • 100 skill schools with locations across India, with a special focus on

10th and 12th school dropouts and graduates • Offers skilling for sectors such as textiles, construction, leather and

leather products, automotive and auto components and logistics, general engineering and services sector

Position paper On External assistance received by India, Government of India, Ministry of Finance Department of Economic Affairs

“National Policy on skill Development“, World Bank website (http://siteresources.worldbank.org/EDUCATION/Resources/278200-1121703274255/1439264-1242337549970/6124382-1288297991092/IndiaGovDocMar09.pdf?bcsi_scan_debb0e326e6a7dd8=0&bcsi_scan_filename=IndiaGovDocMar09.pdf)

Prashant K. Nanda, Sangeeta Singh, “World Bank plans to fund skill development in India”, Mint, 14 February 2012

“Knowledge Bank”, National Skill Development Corporation website (http://www.nsdcindia.org/knowledge bank/index.aspx )

Knowledge paper on skill development in India Learner first, September 2012, FICCI and Ernst & Young Pvt. Ltd.

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