The Hindu Business Line : Mumbai aims to be global financial centre

From the financial capital of India to a Shanghai in the making, Mumbai has earned itself several sobriquets along its brisk journey to the top of the nation’s economic growth chart. And now, Mumbai is being touted as a potential International Financial Centre (IFC) and, perhaps much later, a global financial centre (GFC) such as London and New York.

Doubtless it will take Mumbai quite some years to segue into an IFC, but the fact that the Union Government has flagged off a debate to this effect indicates that the city has the potential. However, given the city’s creaking civic infrastructure and regulations that still exist in the Indian financial system, it would certainly take more than just a debate to heave Mumbai up to that stratosphere of the global economy.

The debate took a platform at the recent national conference on ‘Mumbai as an International financial centre’ in the city, when the recommendations of a high-power expert committee were placed before the audience.

“Mumbai is best suited to become an IFC because of its unique geographic location, rich financial history, availability of highly skilled professionals, presence of leading stock exchanges, financial institutions and regulator. Mumbai can establish its claim to be an IFC much ahead of places such as Dubai, Singapore and Frankfurt,” the State Minister for Finance, Mr Jayant Patil, said while inaugurating the conference.

However, it is felt that Mumbai has to upgrade its infrastructure, both physical and institutional, if it were to become a successful IFC. The State Government assured the conference that “there will be a sea change in the landscape of Mumbai in the next five to ten years.”

What are IFCs? “Financial centres that cater to customers outside their own jurisdiction are referred to as IFCs or regional financial centres (RFCs) or offshore financial centres (OFCs). These centres are international in the sense that they deal with the flow of finance and financial products/ services across borders,” the expert committee report says.

An example of procuring an International Financial Service (IFS) from an IFC would be the raising of debt. “If Mumbai became an IFC, a South African railway project could issue a bond there in the primary market. It would wish to do so because of Mumbai’s sophisticated securities markets, along with a number of asset managers in Mumbai running global portfolios. If the INR (Indian rupee) bond market was developed, the South African bond market could be INR dominated. Global investors would buy these bonds and trade them on the secondary market in Mumbai. And each of these steps would generate revenues from the export of financial services from Mumbai,” the report said. In other words, creating an IFC in India required that Mumbai must be viewed as competitive in the eyes of the South African Railways, as also in the eyes of the global bond investors, when compared with alternatives such as Singapore or London.

The global IFS market is one in which competition is driven by rapid innovation in financial products, services, instruments, structures and arrangements to accommodate and manage myriad requirements, risks and the quest for cost reduction, the report said.

Currently, London, New York and Singapore are the only global financial centres. Many emerging IFCs around the globe, such as Shanghai and Dubai, are aspiring to play a global role, while other IFCs in Europe and Asia, like Paris, Frankfurt or Tokyo, connect their financial systems to the world.

The IFS products and services that IFCs provide include such activities as fund raising for individuals, corporations and governments (sovereign and sub-sovereign), asset management and global portfolio diversification, personal wealth management for HNIs, global transfer pricing, global/regional mergers and acquisitions and financing for global/regional public-private partnerships. While GFCs provide all of these services, other IFCs provide some combination of them.

India’s demand for IFS

The report said that Indian households are estimated to have accumulated considerable wealth outside the country, well “beyond the present limits set up RBI”. Further, the proliferation of Indian MNCs operating across the globe and transfer pricing with their subsidiaries abroad, has led to IFS demand for fund-raising, corporate treasury management and global tax management. All these imply inevitable increase in IFS purchases associated with the growing size of cross-border flows.

“Calculations suggest that the IFS revenue stream works out to two per cent of the gross flows across the boundary. And, this translates to about $13 billion of IFS purchases by Indian clients in 2005. Our estimates suggest that IFS purchases by Indian households and firms will rise to $48 billion by 2015 on the basis of conservative assumptions in a base-case scenario. Under more propitious circumstances (example if GDP growth is sustained at nine per cent) that figure could be over $70 billion and by 2025 the amount could exceed $120 billion in nominal terms,” the report pointed out.

The rapidly growing demand for IFS in India provides an opportunity for its financial services industry that the domestic software industry never had.

India’s competitive advantages

India’s competitive advantages include the hinterland advantage and human capital. Taking these into account, the initial conditions supporting India’s entry into the global market for IFS are promising.

But, the report pointed out, it still confronted some “daunting challenges”, including financial regime governance in India, missing markets and institutions and urban facilities and governance in Mumbai.

The report has identified two key strategic institutional weaknesses in Indian finance that impede IFS production.

“The most critical financial market components missing in India are a properly functioning bond market, a currency market and a derivatives market for currencies and interest rates,” it pointed out.

The second deficiency is a universe of institutional investors that have the size, visibility and capability of those in established IFCs.

India lacks domestic commercial and investment banks capable of taking on global counterparts without higher levels of capitalisation, global market access and high level human capital. India also lacks large securities brokerages capable of competing with global counterparts, according to the report.

The report has suggested a ten-point strategy towards establishment of an IFC.

This includes macroeconomic (fiscal and monetary) management, strategy for public debt financing, capital account convertibility, taxation of IFS and opening up space for IFS support services infrastructure.

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