MUMBAI: An International Financial Centre [MIFC]€¦ ·  · 2007-08-27MUMBAI: An International Financial Centre? [MIFC] ... Fund raising for all types of entities: public, private,

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MUMBAI: MUMBAI: An International Financial Centre?An International Financial Centre?

[MIFC][MIFC]

High Powered Expert Committee (HPEC) ReportHigh Powered Expert Committee (HPEC) Report

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1. Does India need an IFC?1. Does India need an IFC?From now on From now on –– Absolutely!Absolutely!WHY? WHY? Because of IndiaBecause of India’’s:s:

Inherent size and growthInherent size and growthTrade, investment and globalisationTrade, investment and globalisationEnormous infraEnormous infra--investment needsinvestment needsRapidly emerging global significanceRapidly emerging global significanceIndian economy: 4Indian economy: 4thth largest by 2025largest by 2025

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1. Does India need an IFC?1. Does India need an IFC?

Export revenue gExport revenue growthrowthExport services Export services diversificationdiversificationBB--oo--P considerations: Why import IFS?P considerations: Why import IFS?IFS exports will automatically improve IFS exports will automatically improve

quality of domestic financial servicesquality of domestic financial servicesIndiaIndia’’s next stages of growth & globalisation s next stages of growth & globalisation

will be highly IFS reliantwill be highly IFS reliant

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2. What kind of IFC?2. What kind of IFC?A.A. Global Global -- GFC? <<<< 2GFC? <<<< 2B.B. Regional Regional -- RFC?RFC?C. National C. National -- IFC? >>>> 1IFC? >>>> 1D. Offshore D. Offshore -- OFC?OFC?E.E. Niche Niche -- NFC?NFC?Most likely path for MumbaiMumbai:

Phase 1 – IFC (C) 2008-2012Phase 2 - GFC (A) 2013-2020

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3. Inherent logic of MIFC3. Inherent logic of MIFC

An Indian IFC (in Mumbai) must be:Rooted in the domestic financial systemServe the hinterland + external IFS marketsFull-fledged and NOT just an ‘OFC-in-SEZ’Regulated under a unified DFS+IFS regimeWorld class in capability, integrity, width, depth, full range of IFS services and liquidityProperly integrated NOT artificially segmentedAble to evolve toward LON/NY capabilities

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4. Implications of this logic for4. Implications of this logic forMacroeconomic policy & managementFinancial system regulation approachFinancial market structure/integrationCurrent universe of financial firmsCritical support systems for IFS: i.e.

• Legal support of global standards• Accounting/auditing support• ICT hardware and software support• Business consulting systems• High-powered applied research support

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4. Implications of this logic for4. Implications of this logic forSocial institutional (soft) infrastructurePhysical (hard) infrastructureMechanisms for transparencyMechanisms for accountabilityStandards of capability & governance

•

Corporate

• Public: Centre, State, Municipal, PSUs• Judicial system & law-order enforcement• Political/legislative system

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5. What are IFS? 5. What are IFS? Fund raising for all types of entities: public, Fund raising for all types of entities: public, private, mixed, multilateral, voluntaryprivate, mixed, multilateral, voluntaryFund/asset managementFund/asset managementPrivate wealth managementPrivate wealth managementCorporate treasury managementCorporate treasury managementDiversified risk managementDiversified risk managementExchange trading of all kinds of EBCD Exchange trading of all kinds of EBCD instruments and variantsinstruments and variants

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5. What are IFS?5. What are IFS?

Global transfer pricingGlobal tax managementComplex financial engineeringfor large projects/corporate deals

Cross border M&A Complex PPPs: global/regional

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6A. Can India provide IFS? 6A. Can India provide IFS? –– ProsProsMore easily than most countries. Why?

Human resources & endowmentsConstitutional basis for rule of lawEstablished capital markets w/potentialLead in ICT service provision, BPO/KPOCommon use of EnglishGlobal ‘Mindshare’Location: i.e. geography & time zone21st century is the ASIAN centuryIndia ideally placed to serve Asia’s needs

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6B. Can India provide IFS? 6B. Can India provide IFS? -- ConsConsBut there are significant impediments:

Financial system regulatory regimeRegulatory architecture for DFS & IFSDeep macroeconomic dysfunctionalitiesFinancial market deficits: absent-BCDFinancial firm shortcomings resulting in:• Absence of scale/scope economies• Absence of sufficient competition• Relative absence of financial innovation

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6B. Can India provide IFS? 6B. Can India provide IFS? -- ConsConsDomestic skill sets are ‘Behind the Curve’Legal & IFS support system deficienciesPolitical & administrative weaknessesGovernance deficits: Centre, state, cityPhysical & social infrastructure deficitsState as owner of a large part of the DFSResultant conflicts-of-interest in rolesPerceptions of disadvantage for others

All figures in nominal USD terms 13

7. 7. IllustrativeIllustrative dimensionsdimensions

YearYear 20052005 20102010 20152015 20202020World OutputWorld Output $44.0 T.$44.0 T. $63.1 T.$63.1 T. $ 88.6 T.$ 88.6 T. $ 122 T.$ 122 T.

Global IFS Rev.Global IFS Rev. $ 1.1 T.$ 1.1 T. $ 1.9 T.$ 1.9 T. $ 3.6 T.$ 3.6 T. $ 6.9 T.$ 6.9 T.

India GNIIndia GNI $ 740 B.$ 740 B. $ 1.4 T. $ 1.4 T. $ 2.8 T.$ 2.8 T. $ 5.5 T.$ 5.5 T.

BB--oo--P FlowsP Flows $ 658 B.$ 658 B. $ 1.4 T.$ 1.4 T. $ 3.4 T.$ 3.4 T. $ 6.8 T. $ 6.8 T.

IFS Revenues IFS Revenues $ 13.1 B.$ 13.1 B. $ 26.1 B.$ 26.1 B. $ 62.8 B.$ 62.8 B. $ 150+ B$ 150+ B

Indian MarketIndian Market $ 13.14 B.$ 13.14 B. $ 23.61 B.$ 23.61 B. $ 47.80 B.$ 47.80 B. $ 100+ B.$ 100+ B.

Other MarketsOther Markets $ 0.00 B.$ 0.00 B. $ 3.50 B.$ 3.50 B. $ 15.00 B.$ 15.00 B. $ 50+ B.$ 50+ B.

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8. A glimpse of the future8. A glimpse of the future

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9. Removing policy impediments9. Removing policy impedimentsA.A. MarketMarket deficienciesdeficiencies

Fill gaps in the BCD NexusFill gaps in the BCD NexusBonds, currencies, full range of derivativesBonds, currencies, full range of derivativesStrengthen institutional investor universeStrengthen institutional investor universeRectify weaknesses in banking systemRectify weaknesses in banking systemFoster strong Indian iFoster strong Indian investmentnvestment banksbanksStrengthen insurance and reinsuranceStrengthen insurance and reinsuranceGlobalise exchanges and capital marketsGlobalise exchanges and capital marketsRestructure securities brokerage industryRestructure securities brokerage industryEncourage wholesale asset managementEncourage wholesale asset management

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A liquid, efficient A liquid, efficient sovereignsovereign bbond marketond market with arbitrage with arbitrage free INR yieldfree INR yield--curve for maturity spectrumcurve for maturity spectrumA wide range of A wide range of derivatives on INR interest ratesderivatives on INR interest rates to to enable investors to hedge against interest rate shiftsenable investors to hedge against interest rate shiftsA liquid spot market for INR A liquid spot market for INR corporatecorporate bonds across the bonds across the full maturity spectrumfull maturity spectrumCredit derivativesCredit derivatives on credit spreads and credit events to on credit spreads and credit events to enable credit default risk to be managedenable credit default risk to be managedA liquid and efficient A liquid and efficient currency trading marketcurrency trading market for INR for INR vs. major globally traded currenciesvs. major globally traded currenciesA full range of A full range of currency derivativescurrency derivatives (futures, options, (futures, options, swaps, swaptions, collars and caps)swaps, swaptions, collars and caps)

9a. What is the BCD Nexus?9a. What is the BCD Nexus?

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9aa. The BCD Nexus: A graphic9aa. The BCD Nexus: A graphic

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9.Removing policy impediments9.Removing policy impedimentsB. Macroeconomic policy twistsB. Macroeconomic policy twists

Reduce consolidated fiscal deficitsReduce Public Debt/GDP RatioFinance public debt differentlyOpen INR sovereign bonds to all investorsModernise/shift public debt managementMonetary policy: Focus on inflation targetEliminate regulatory Conflicts-of-InterestAccelerate schedule for full convertibility

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Risks associated with capital INFLOWSRisks associated with capital INFLOWS•• ShortShort--term speculative surges that are destabilisingterm speculative surges that are destabilising•• Loss of control over management of the exchange rateLoss of control over management of the exchange rate•• Domestic money supply impact and sterilisation risksDomestic money supply impact and sterilisation risks•• Asset price inflation caused by speculative investment Asset price inflation caused by speculative investment •• Risks of increased foreign ownership of Risks of increased foreign ownership of ‘‘IndianIndian’’ assetsassets•• Risk of foreign preferences driving macroRisk of foreign preferences driving macro--economyeconomy

Risks associated with capital OUTFLOWSRisks associated with capital OUTFLOWS•• Destabilising outflow surge in response to policy shifts or Destabilising outflow surge in response to policy shifts or

to changed market expectationsto changed market expectations•• Destabilising sudden outflows caused by external eventsDestabilising sudden outflows caused by external events•• Sudden unanticipated loss of investment and reservesSudden unanticipated loss of investment and reserves•• Collapse of prices in securities or property marketsCollapse of prices in securities or property markets•• Triggering of internal and external payments crisisTriggering of internal and external payments crisis

9b.What risks does convertibility entail?9b.What risks does convertibility entail?

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9.9. RemovingRemoving policy impedimentspolicy impedimentsC. Financial regime governanceC. Financial regime governance

FRG ‘intrinsic’ to financial service/productExtant regulatory/ownership regime:

• Fosters fragmentation of market segments• Re-arranges markets to suit regulators• Discourages competition in/across segments• Impedes service/product innovation• Creates cost-inefficiencies and illiquidity• Prevents scale economies being realised• Discourages market-driven system evolution

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10. Reforming financial regulatory & 10. Reforming financial regulatory & governance regimegovernance regime

Shift from rules-based regulation toprinciples-based regulationPermit use of apex ‘holding companies’ to:• Create Indian financial conglomerates• Remove artificial barriers between various

financial market segments• Focus attention of central Bank on Monetary

policy ONLY

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10. Reforming financial regulatory & 10. Reforming financial regulatory & governance regimegovernance regime

Create separate banking regulatorCombine SEBI and commodities regulatorKeep pensions and insurance regulatorsEncourage financial regulatory system to move toward fusion with a single regulatorShift from entity to domain regulationStrengthen legal system via IFSAT

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11. Tax policy for an IFC11. Tax policy for an IFC

No need for MIFC to be a tax havenNo need for MIFC to be a tax havenNo need for tax exemptions or incentivesNo need for tax exemptions or incentivesNo need to extend SEZ tax treatment to IFCNo need to extend SEZ tax treatment to IFCBut taxes on IFS must be sensible/competitiveBut taxes on IFS must be sensible/competitiveLowLow--competitive income taxes on IFS providerscompetitive income taxes on IFS providersNo capital gains taxes on IFS (or DFS) transactionNo capital gains taxes on IFS (or DFS) transactionNo transactions or turnover taxes on financeNo transactions or turnover taxes on financeApplication of GST to financial servicesApplication of GST to financial servicesGST/VAT to be zeroGST/VAT to be zero--rated for IFS exportsrated for IFS exports

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12.12. MumbaiMumbai’’ss physical infrastructurephysical infrastructureCityCity’’s infrastructure deficits are serious/criticals infrastructure deficits are serious/criticalTo be an IFC Mumbai needs to be 1To be an IFC Mumbai needs to be 1stst world cityworld cityWorld class power supply World class power supply –– stable, reliablestable, reliableTransport linkages with rest of India & WorldTransport linkages with rest of India & WorldUrban transportUrban transport-- Mass transit, Road/Rail/CoastMass transit, Road/Rail/CoastWater supply for residential & commercial useWater supply for residential & commercial useSewerage & liquid/Solid waste disposal needsSewerage & liquid/Solid waste disposal needsMassive revamp of drainage & flood controlMassive revamp of drainage & flood controlTelecommunications: land, cellular, broadbandTelecommunications: land, cellular, broadbandInvestment in all this much larger than envisagedInvestment in all this much larger than envisagedWorld class project management & executionWorld class project management & execution

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13. Mumbai13. Mumbai’’s social infrastructures social infrastructureWorld class social infrastructure needed in:World class social infrastructure needed in:

Healthcare facilities of all kindsHealthcare facilities of all kindsEducation & vocational training (EVT) across board Education & vocational training (EVT) across board Specific EVT facilities for financial skillsSpecific EVT facilities for financial skillsAdequate range of civic organisationsAdequate range of civic organisationsSports/recreational facilities of world standardSports/recreational facilities of world standardCultural facilities catering to global tastesCultural facilities catering to global tastesMedia & entertainment facilities Media & entertainment facilities Global range of hotels and restaurantsGlobal range of hotels and restaurantsFacilities catering to large expatriate populationFacilities catering to large expatriate populationUserUser--friendly state and city governmentsfriendly state and city governments

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14.14. MumbaiMumbai’’ss governancegovernanceInstitutional arrangements for city governance are:

Inappropriate, inadequate, need revampCity’s governance must be independent of stateCity’s management needs to be autonomous, transparent and accountable to city residentsRural electoral influences on decision-making concerning central/state resource allocation to City need to be moderatedBetter co-ordination of central, state and city resources allocated to urban infrastructurePolitical, administrative and ‘Popular’ ethos needs to welcome and embrace ‘foreigners’ as part of Mumbai’s own HR base

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15. HPEC Recommendations15. HPEC Recommendations48 ambitious but clear recommendations48 ambitious but clear recommendationsAlong with a further 23 subAlong with a further 23 sub--recommendationsrecommendationsClear and ambitious timelines for eachClear and ambitious timelines for eachTogether they constitute a specific roadTogether they constitute a specific road--mapmapHPEC asked to opine on what to do to create IFCHPEC asked to opine on what to do to create IFCThat has been done as comprehensively as poss.That has been done as comprehensively as poss.It is now up to policyIt is now up to policy--makers to decidemakers to decideTough political economy constraints on actionTough political economy constraints on actionBut one way or another an IFC will emergeBut one way or another an IFC will emergeQuestion: Will it beQuestion: Will it be competitivecompetitive or aor a mutant?mutant?