Will India ever have an IFC or be internationally competitive?
In April 2007, after reading the executive summary of the report on making Mumbai an International Financial Centre (MIFC), Jamal Mecklai, a risk consultant, wrote a column for Business Standard titled, The end of cynicism. “Reading the executive summary blew me out of my ennui... All that is needed now is to believe”, he wrote.
Indeed, the MIFC report did a lot of good for policy thinking, at least in the finance ministry. The Financial Sector Legislative Reforms Commission (FSLRC), for instance, is an important offshoot. Still, considering that most of the MIFC recommendations are yet to see the light of day, it is hard not to be cynical.
Last month, a standing council on international competitiveness of the Indian financial sector submitted its first set of recommendations to the finance ministry. Like many of its predecessors, it recommended rationalizing and ultimately doing away with capital controls, achieve technically sound financial regulation, and shift to residence-based taxation. The more things change, the more they stay the same, it seems.
But let’s not be too cynical. After all, in the past eight years, some of the recommendations of the MIFC report have been implemented. We now have exchange-traded currency derivatives markets, we have opened the doors for investors to have direct market access and use algorithmic trading tools, and are gradually moving the regulation of all organised market trading to the Securities and Exchange Board of India.
In a few years, exchanges may well be given the freedom to decide on some matters such as how long they can keep their trade matching engines running. (This is one of the standing council’s short-term recommendations.) While this is not to minimise the importance of granting financial intermediaries these freedoms to compete with their global counterparts, this can’t be expected to move the needle much.
The big changes surrounding capital controls need a buy-in from the central bank and those involving taxation requires some tough decisions to be taken by the ministry itself. As things stand, it’s unlikely that the central bank will be gung-ho about any of the standing council’s recommendations.
A few months ago, there was a flurry of activity around the setting up of India’s first international financial services centre (IFSC) in Gujarat. This column had pointed out back then how new rules announced by the Reserve Bank of India (RBI) can be a dampener. A central bank deputy governor had said then that it has been extra careful in framing rules for IFSCs in India. See: http://mintne.ws/1za2Phi
In short, the RBI and the finance ministry have rarely seen eye-to-eye when it comes to financial market reforms. So it’s one thing for another committee to make another set of similar recommendations on lifting capital controls. For things to actually move on this front, the central bank should first show some inclination.
The standing council’s report also talks of a two-pronged approach being followed by the government, which is quite unlike the big bang approach recommended by the MIFC committee. Now, India will support international financial services centres, such as the one coming up at Gujarat International Finance Tec-City (GIFT)—the idea being that these centres will improve Indian export of financial services. In parallel, domestic financial markets will be strengthened (by implementing the recommendations of the standing council), to ensure that they don’t lose further market share to competing global venues.
The MIFC committee was far bolder in its approach and had recommended far-reaching changes in regulation, taxation and capital controls for the entire mainland, rather than focus on just particular centres within the mainland. One might argue that it’s too much to expect such vast changes given India’s political constraints, and that the two-pronged approach fits in well with ground realities.
But the two-pronged approach can lead to confusion. It already is. The standing council report and an earlier one on IFSCs, uploaded on the finance ministry’s website, talk of winning back share in Nifty and rupee-dollar trading from global venues such as Singapore and Dubai. Some trading firms will find it easier to trade in overseas locations because of cost reasons and economies of scale. Some stay away due to bad regulation and capital controls. The way to win back lost share is to strengthen our main markets rather than follow two approaches to solve the same problem.
To the standing council’s credit, its recommendations will go a long way in strengthening markets in the mainland. However, votaries of IFSCs may point out that this will drastically reduce the attractiveness, if any, of having a dedicated IFSC.
But there’s more to IFSCs than winning back share in Nifty and rupee-dollar markets, and its existence may be justified for other reasons. But the two-pronged approach looks unexciting and like a compromise. The standing council’s report, for instance, explains that a parallel strategy has been devised since “it will take some years for the Indian Financial Code to be enacted and enforced.”
It’s ironic that in 2007, a group of experts advised the coalition United Progressive Alliance-1 government to enact bold reforms to transform financial markets. Eight years later, a government with a clear majority is presented with a compromise formula as bold reforms may take time. We have all become all the more cynical.
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