The city of a million Bollywood dreams now has a powerful reverie of its own.
A committee, set up by the Indian government to propose a strategy for turning Mumbai into an international financial centre, has devised a truly bold road map. All that’s needed now is an influential champion of the cause, someone who would keep up the pressure on short-sighted politicians and phlegmatic bureaucrats until every single recommendation of the report has been implemented.
It would be a huge blunder if the country, so tantalizingly close to realizing the full benefits of financial globalization, got scared by the risks and walked away from the prize.The basic premise of the committee’s report, which was unveiled on 2 April, is that if India can boost the growth rate of its gross domestic product to 10%, it would have a $10 trillion economy by 2025, the same size as today’s Euro area.
By then, Indian households and firms will need $120 billion of international financial intermediation annually.
A failure to turn Mumbai into a global financial centre “will simply oblige Indian customers to do increasing business abroad,” the report notes, citing the $12.3 billion purchase of the UK’s Corus Group Plc by Tata Steel Ltd, which generated fees for bankers in Singapore and London. What will it take for Mumbai to become a finance hub, one that can tap opportunities in the Indian hinterland as well as handle business originating elsewhere?
A new attitude
Improvements in civic amenities that would make it “a hospitable global city for a large and demanding expatriate population” are critical, though this isn’t the focus of the report. There’s already a McKinsey & Co. blueprint available for making Mumbai a better city.
The emphasis of this report is on redesigning the architecture of the Indian financial system. The big change has to be in the mindset.
Ten years after the Asian financial crisis, policymakers in India are still patting themselves on the back for having avoided the contagion by hiding behind capital controls. They remain convinced that allowing too much financial traffic is a sure recipe for accidents. In this pessimistic view, which they call “gradualism,” the only way to avoid mishaps is to place a policeman at every corner and a roadblock every half a mile. That’s why financial innovations that aren’t explicitly permitted—such as a popular interest-rate swap that involved betting on US borrowing costs—eventually get banned or severely restricted in India.
None of this would be tolerated in an international financial centre. Regulatory high-handedness in the US is proving to be a drag on New York’s competitiveness. For Mumbai to stand a chance, it must allow more freedom.
The right approach for India is to increase the country’s capacity to live with high volumes of financial traffic. This, as the UK’s Financial Services Authority has shown, requires light-touch, principles-based regulation.
As a first step, the state’s dominance of the Indian financial system must end. The government, which is the biggest shareholder in the Indian banking and insurance industries, must gradually cut its ownership of any financial firm.The committee has set a target of 2015 for a complete exit. There will be enormous political obstacles to this recommendation, though it must be implemented.
The other urgent requirement is to break up the Reserve Bank of India, which is both the banking regulator and a manager of public debt. That’s a conflict. Even its core task of monetary management is compromised by an unspoken commitment to keeping the home currency competitive.
The panel recommends hiving off public-debt management to a new authority within or outside the folds of the finance ministry. This may happen quite soon.
Finance minister P. Chidambaram announced the plan in his 28 February Budget. The committee also favours handing over regulation of trading in bonds, currencies and commodities to the Securities and Exchange Board of India, the stock market regulator. More controversially, the expert group wants the authorities to explore the feasibility of moving to an inflation-targeting regime with the central bank ceding its commitment to keeping the exchange rate stable.
The remaining capital controls will, of course, have to go. The panel’s timeframe is an ambitious 18 months to two years. Every market-entry obstacle in the way of international banks as well as legal and accounting firms must be removed.
None of this will be palatable to entrenched interests. Yet, if the panel’s suggestions get buried in government archives, it won’t be just another policy misstep. For here is a blueprint for India to take the big leap from “emerging” to “emerged” nations. Finance won’t create as many new jobs in India as, say, the outsourcing of computer software code-writing work. Yet high-paying finance jobs will still create substantial ripple effects in the rest of the economy. That’s why this report urgently needs someone like Prime Minister Manmohan Singh to back it, though it is doubtful he would. Every plan to distribute poverty in India finds 1,000 supporters; prosperity initiatives usually struggle alone.