In the future, will the business of finance get concentrated in a handful of cities, or will it get dispersed around the world? The success of the bold plan announced on 4 April, by a committee headed by former World Bank economist Percy Mistry, to make Mumbai into an international financial centre could depend on the answer to this question.

The grand vision to make India’s financial capital into another London or New York is worthy of support. Most other government reports on the financial sector have suffered from a curse of timidity. India’s financial watchdogs have been gradualists, especially after the Asian financial crisis of 1997. Hence the caution in allowing foreign investment into banks or hedge funds into the stock market. The Mistry committee must have been aware of the risks of premature financial sector reform; but it has focused on the opportunities instead.

A whole array of reforms has been suggested—from making the rupee convertible to introducing new financial instruments to changes in regulations to investing in Mumbai’s physical infrastructure. But it is worth remembering that other cities are also in the race. Dubai and Shanghai are two that come immediately to mind. So, the task before Mumbai, even if all the other things fall into place, will be to compete against other Asian challengers to the throne and also against the ruling trio of New York, London and Singapore.

But is there place for another global financial centre? It depends on whether we will see more financial centres in the future, or less.

There are two simultaneous forces at work, one that splinters financial activity and the other that glues it to one place. The splintering force is technology. Today, anybody with a trading screen can buy and sell foreign exchange from any part of the world. Global payment systems, too, have become increasingly computerized, which reduces the importance of central clearing houses. It is quite conceivable that we could also have independent and computerized equity trading platforms in the future. Location can become irrelevant.

Yet, there is a binding force as well. Certain economic activities tend to work best in clusters where there is high-quality labour, information sharing and economies of scale. These clusters do not compete on cost alone. Hollywood will not be under threat just because actors and technicians are cheaper in India. London flourishes despite sky-high rents and salaries because of its innate strengths as a financial centre. It is far more difficult to dislodge a cluster, rather than a single company or industry.

We believe that despite the power of computer networks to disperse financial activity around the globe, financial centres will continue to flourish. And despite the “stickiness” of a cluster, power will shift. This has happened in recent years in a limited way, as capital issuance has moved from New York to London after the Sarbanes Oxley Act was passed in the US. The question is whether Mumbai can develop to challenge New York, London and Singapore. Financial openness, depth and regulatory reform are going to be very important. A booming economy and the fact that demand for cross-border financial transactions has increased from $105 billion in 1992 to $658 billion in 2005 will not be enough.

There is a sobering lesson to learn from what happened in Tokyo. The Japanese government tried to make Tokyo into a financial powerhouse in the 1980s, when the Japanese economy was the envy of the world. But Japan had a closed and shallow financial system. Tokyo was out of the reckoning as soon as the Japanese bubble burst in 1989.

Mumbai’s journey will be tough, but one worth taking.

Can Mumbai become an international financial centre? Your comments are welcome at views@livemint.com