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New Delhi April 2 The High Powered Expert Committee (HPEC) looking into issues necessary to make Mumbai an international financial centre has identified six advantages that India has in creating such a centre.

In the report released on Monday, the committee has noted that the country has witnessed rapid GDP growth and more growth of cross-border flows on both the current and the capital accounts.

Cross-border flows inevitably induce demand for International Financial Services (IFS). The committee estimates that in 2005 IFS purchases by India amounted to roughly $13 billion. By 2015, these are estimated to rise to between $50 billion and $70 billion a year.

This has two implications. If India does not proceed on establishment of an International Financial Centre (IFC), these revenues will go to other IFCs. Conversely, if India chooses to move forward towards an IFC, this natural hinterland advantage would assist this process, according to the committee.

Human capital

Secondly, in terms of human capital, India has four strengths in human capital namely the extensive use of English, generations of experience with risk-taking and financial trading, strengths in IT and mathematics and the prominent role that individuals of Indian origin play in the global financial firms from which India would require FDI for establishing an IFC.

In terms of location, Mumbai is well situated in terms of time zones, with an overlap of a few hours with London, while being able to communicate with all of Asia and Europe throughout the trading day. There is no other IFC in Indian Standard Time.

The country's sound foundations of freedom of speech, democracy, and rule of law are another advantage.

The committee said that the high GDP growth, the success with BPO, and the success of Indians worldwide has given the country considerable mind-share amongst global financial firms.

Also, India has world-class exchanges, which rank third and fifth in the world by number of transactions.

These advantages imply that India has a superior starting point on the movement towards export of financial services, compared with the nascent beginnings of software export from India.

Some constraints

However, the committee has identified some constraints that could hold India back.

The two strategic weaknesses of finance are `missing' markets for debt, currency and derivatives, and the inadequate universe of institutional investors. An IFC requires a full range of traded instruments, with high levels of liquidity, with all prices being linked up to each other through arbitrage.

A large proportion of the key financial products of an IFC are either absent in India, or the markets are illiquid and inefficient with weak arbitrage. The size, sophistication and the competitive pressures operating on large financial firms in India are highly inadequate.

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