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In 2007, the Gujrat government set up an International Financial Service Centre (IFSC) at Gujarat International Fin-Tec City (GIFT City) to be developed as a centre for global finance. In the last six-odd years, the city has seen slow progress. It is time to reinvent GIFT City, not only as a physical location for global finance, but as a digital destination for global financial transactions.

Global finance has changed in the last 14 years, from physical to digital. Establishing a new IFSC today cannot be about old-world attributes such as physical locations, permanent establishments of companies in a physical location, or even the movement of expertise or knowledge; all these are old world. The focus of a new-world IFSC will have to be a re-imagination of incentives, from its current locational proposition to becoming a transactions platform that captures global financial transactions of investment, and, more importantly, digital trade.The re-imagination has to envisage the future flow of global transactions from an outsider’s perspective, different from the past perspective of investment inflows. GIFT City has to let go of the obsession with merely attracting (and capturing) inflows into India. For any chance of future success, it has to think of itself as an enabler of global transactions and position itself for the international investor on this futuristic proposition.

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Concept vs reality: GIFT City was envisaged as an integrated development centre. Built on 886 acres—a conducive multi-service special economic zone (SEZ) spread over 261 acres and an exclusive domestic tariff area (DTA) spread over an additional 625 acres—on the outskirts of Gandhinagar in Gujarat, it was conceptualized in 2007 by the then chief minister of Gujarat, Narendra Modi. It was given regulatory recognition by the central government in 2015 soon after Modi became India’s Prime Minister.

The plan envisaged building 62 million square feet of commercial, residential, and social spaces.

Yet, international finance no longer depends on physical amenities, as people with expertise may already be working digitally from remote locations. The crucial issues are taxation and the incentives for initiating and fulfilling transactions. Expertise is location-independent; it can be plugged in as an intervention or as an algorithm.

Yet, this shift in global finance is being ignored by regulators and policymakers as they chase and build obsolete analogue models of a financial services world that is already overwhelmingly digital.

Financial services have a huge potential for growth. A dedicated hub can contribute significantly to advancing this sector. In 2015, the financial sector provided 5 million jobs and 5% of India’s gross domestic product (GDP). With the right plan and the right incentives, it is possible to increase the GDP contribution of financial services to 15% and employment to 11 million.

From a location-incentives model to a transaction-incentives superstack: A recent report published by the Global Financial Centres Index ranks GIFT City third among 15 centres that could grow in significance over the next few years. But its growth as a physical location is limited by physical and cultural constraints. An IFSC deals with the flow of finance and financial products and services across borders, the mandate being to undertake transactions that are currently handled by overseas financial institutions and overseas branches/subsidiaries of Indian financial institutions. Yet, the focus remains on attracting investment from non-resident Indians or just the inflows into India.

This objective needs to change—from attracting people, companies and offices, to attracting transactions and flows of global capital movement instead. India should create a world-class digital superstack that houses both a services stack and an incentives stack of the tax and other incentives needed to attract global transactions through GIFT City. All that is needed is a data centre and public-spirited technologies to come together and create a digital superstack, one that would be very similar to the unified payments interface (UPI) digital stack for transactions between banks and digital wallets.

As with the UPI stack that has shown its efficacy, the services and incentive stacks would talk to each other and myriad users of the system through application programming interfaces (APIs).

Making the GIFT City digital superstack work: The base of this digital superstack has to be an Indian custodian bank that can provide global wealth management services in an investor’s currency of choice. This would be possible if India’s banking regulator, the Reserve bank of India, allows Indian custodian bank licences under a new differentiated bank licensing scheme.

Businesses such as re-insurance, insurance, banking services, and investment in equities and commodities will be transacted through this digital superstack. Stock exchanges and other critical service providers will plug into it to make the process seamless.

To get a critical mass of transactions and volume into the GIFT City superstack, the focus of regulations needs to shift. Intermediaries (banks, custodians, brokers and fund managers) in India should be allowed to set up branches in GIFT City after applicable regulatory clearances. These branches will specifically cater only to foreign or overseas investors and work through the digital superstack. A critical mass already exists of intermediaries providing some of these services, with their capital bases well in place; only incremental capitalization should be stipulated, linked to business volume, on the pattern of the prudential norms that are applied to banks.

K. Yatish Rajawat is a public policy expert who runs Center for Innovation in Public Policy, a think-tank

This is a version of a policy brief prepared by the author for the Center for Innovation in Public Policy (www.cipp.in/assets/img)

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