NEW DELHI: The high-powered government-appointed committee to look at ways to transform Mumbai into an international financial centre has suggested the government reduce its shareholding in financial institutions and usher in capital-account convertibility.
“The committee would suggest that the legislature contemplate a general policy of reducing the state’s present shareholding in all types of financial arms to below 49% by end 2015,” said its report.
The road to transformation will need free foreign participation in Indian debt market, said the committee. It will need to be supplemented by an improvement in Mumbai’s urban infrastructure. These recommendations are not binding on the government.
The committee, which included members from the government and private sector, was appointed under the chairmanship of development economist Percy S. Mistry following the 2005-06 budget.
The two distinct phases in the committee’s road map are a five-year period (2007-2012) where Mumbai connects India’s financial system to the world’s financial markets. In the second phase, through 2020, Mumbai is expected to develop the capacity to join the likes of London, Singapore and New York as one of the world’s premier financial centres.
The committee’s strategy will need the government to work on reducing the proportion of debt to GDP and reform monetary policy. It would also like the government to work on new approaches to public-debt financing. Currently, public debt is raised through a mix of market-driven interest rates and administered rates fixed for small savings schemes.
The committee said current low sophistication in the debt, currency and derivatives markets in India is a weakness. To offset the weakness, the committee has asked for the creation of a bond-currency derivative markets “nexus.”
The Indian corporate debt market lacks depth on account of some systemic shortcomings, said Arun Kaul, general manager (Treasury and Finance) at Punjab National Bank. The absence of a benchmark interest rate in India makes matters worse, he added. The problem here is not the absence of information about the the shortcomings, but it’s about the implementation of remedial measures, said Naresh Takkar, managing director of credit rating agency ICRA Ltd.The financial market in India is fragmented with multiple regulators. Indian financial intermediaries, such as banks, are present in multiple markets directly and through subsidiaries. The committee wants the financial market to be integrated.
The final recommendations include improving Mumbai’s urban infrastructure and urban governance to draw in the brightest immigrants. The committee believes the multi-pronged strategy could work as it would be built on existing advantages. The size of the domestic economy and robust growth it’s seen in the recent past is one such advantage.