Transcript MUMBAI: An International Financial Centre [MIFC]
MUMBAI:
An International Financial Centre?
[MIFC]
High Powered Expert Committee (HPEC) Report 1
1. Does India Need an IFC? -1 From Now On – Absolutely!
WHY?
Because of India’s:
Inherent Size and Growth Trade, Investment and Globalisation Enormous Infra-Investment Needs Rapidly Emerging Global Significance Indian Economy: 4 th Largest by 2025
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1. Does India Need an IFC? - 2
Export Revenue Growth Export Services Diversification B-o-P Considerations: Why Import IFS?
IFS Exports will automatically improve quality of Domestic Financial Services India’s Next Stages of Growth & Globalisation will be highly IFS reliant
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2. What kind of IFC?
A.
B.
C.
D. E.
Global Regional National Offshore Niche - GFC? <<<< 2 - RFC?
- IFC? >>>> 1 - OFC?
- NFC?
Most Likely Path for
Mumbai
:
Phase 1 – IFC (C)
Phase 2 - GFC (A) 2008-2012 2013-2020
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3. Inherent Logic of M-IFC
An Indian IFC (in Mumbai) must be:
Rooted in the domestic financial system Serve the hinterland + external IFS markets Full-fledged and NOT just an ‘OFC-in-SEZ’ Regulated under a unified DFS+IFS regime World Class in capability, integrity, width, depth, full range of IFS services and market liquidity Properly
integrated
NOT artificially
segmented
Able to evolve toward LON/NY capabilities
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4.1 Implications of this Logic for:
Macroeconomic Policy & Management Financial System Regulation Approach Financial Market Structure/Integration Current Universe of Financial Firms Critical Support Systems for IFS: i.e.
Legal Support of Global Quality Standards World Class Accounting/Auditing Support Cutting Edge ICT Hardware and Software Support World Class Business Consulting Systems High-Powered Applied Financial Research Support
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4.2 Implications of this Logic for:
Social Institutional (Soft) Infrastructure Physical (Hard) Infrastructure Mechanisms for Transparency Mechanisms for Accountability Standards of Capability & Governance
Corporate Governance & Compliance Public: Centre, State, Municipal, PSUs
Judicial System & Law-Order Enforcement
Political/Legislative System
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5.1 What are IFS?
Fund Raising
for all types of entities: public, private, mixed, multilateral, voluntary
Fund/Asset Management Private Wealth Management Corporate Treasury Management Diversified Risk Management
Exchange Trading
instruments and variants of all kinds of EBCD
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5.2 What are IFS?
Global Transfer Pricing Global Tax Management Complex Financial Engineering Cross Border M&A Complex Public-Private Partnerships
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6.1 Can India Provide IFS? - Pros
More easily than most countries. Why?
Human Resources & Endowments Constitutional Basis for Rule of Law Established Capital Markets w/Potential Lead in ICT Service Provision, BPO/KPO Common Use of English Global ‘Mindshare’ Location: i.e. Geography & Time Zone 21 st Century is the ASIAN Century India ideally placed to serve Asia’s IFS needs
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6.2 Can India Provide IFS? – Cons 1
But there are significant impediments:
Financial System Regulatory Regime Regulatory Architecture for DFS & IFS Deep Macroeconomic Dysfunctionalities Financial Market Deficits: Absent-BCD Financial Firm Shortcomings resulting in: Absence of Scale/Scope Economies Absence of Sufficient Competition Absence of Financial Innovation
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6.3 Can India Provide IFS? – Cons 2
Domestic Skill Sets are ‘Behind the Curve’ Legal & IFS Support System Deficiencies Political & Administrative Weaknesses Governance Deficits: Centre, State, City Physical & Social Infrastructure Deficits State as Owner of a Large Part of the DFS Resultant Conflicts-of-Interest in Roles Perceptions of Disadvantage for Others
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7. Illustrative Dimensions of IFS Year World Output Global IFS Rev.
India GNI B-o-P Flows IFS Revenues Indian Market Other Markets 2005 $44.0 T.
$ 1.1 T.
$ 740 B.
$ 658 B.
$ 13.1 B.
$ 13.14 B.
$ 0.00 B.
2010 $63.1 T.
$ 1.9 T.
$ 1.4 T. $ 1.4 T.
$ 26.1 B.
$ 23.61 B.
$ 3.50 B.
2015 $ 88.6 T.
$ 3.6 T.
$ 2.8 T.
$ 3.4 T.
$ 62.8 B.
$ 47.80 B.
$ 15.00 B.
2020 $ 122 T.
$ 6.9 T.
$ 5.5 T.
$ 6.8 T. $ 150+ B $ 100+ B.
$ 50+ B.
All figures in nominal USD terms 13
8. A Glimpse of the Future
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9. Removing Policy Impediments
A. Market Deficiencies
Fill Gaps in the BCD Nexus Bonds, Currencies, Full Range of Derivatives Strengthen Institutional Investor Universe Rectify Weaknesses in Banking System Foster Strong Indian Investment Banks Strengthen Insurance and Reinsurance Globalise Exchanges and Capital Markets Restructure Securities Brokerage Industry Encourage Wholesale Asset Management
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9A. What is the BCD Nexus?
A liquid, efficient sovereign Bond Market with arbitrage free INR yield-curve for maturity spectrum A wide range of derivatives on INR interest rates to enable investors to hedge against interest rate shifts A liquid spot market for INR corporate bonds across the full maturity spectrum Credit derivatives on credit spreads and credit events to enable credit default risk to be managed A liquid and efficient currency trading market for INR vs. major globally traded currencies A full range of currency derivatives (futures, options, swaps, swaptions, collars and caps)
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9B. The BCD Nexus: A Graphic
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9.1 Removing Policy Impediments
B. Macroeconomic Policy Twists
Reduce Consolidated Fiscal Deficits Reduce Public Debt/GDP Ratio Finance Public Debt Differently Open INR-GoI Bonds to Global Investors Modernise/Shift Public Debt Management Monetary Policy: Focus on Inflation Target Eliminate Regulatory Conflicts-of-Interest Accelerate Schedule for Full Convertibility
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9.2 What Risks Does Convertibility Entail?
Risks associated with Capital INFLOWS
Short-Term Speculative Surges that are destabilising Loss of Control over management of the Exchange Rate Domestic Money Supply Impact and Sterilisation Risks Asset Price Inflation caused by speculative investment Risks of increased foreign ownership of ‘Indian’ assets Risk of foreign preferences driving macro-economy Risks associated with Capital OUTFLOWS
Destabilising outflow surge in response to policy shifts or to changed market expectations Destabilising sudden outflows caused by external events Sudden unanticipated loss of investment and reserves Collapse of prices in securities or property markets Triggering of internal and external payments crisis
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9.3 Removing Policy Impediments
C. Financial Regime Governance
FRG ‘intrinsic’ to financial service/product Extant 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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10.1 Reforming Financial Regulatory & Governance Regime
Shift from Rules-based Regulation to Principles-Based Regulation Permit 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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10.2 Reforming Financial Regulatory & Governance Regime
Create Separate Banking Regulator Combine SEBI and Commodities Regulator Keep Pensions and Insurance Regulators Encourage Financial Regulatory System to move toward fusion with a Single Regulator Shift from Entity to Domain Regulation Strengthen Legal System via IFSAT
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11. Tax Policy for an IFC
No Need for MIFC to be a Tax Haven No Need for Tax Exemptions or Incentives No Need to extend SEZ Tax Treatment to IFC But Taxes on IFS must be sensible/competitive Low-Competitive Income Taxes on IFS Providers No Capital Gains Taxes on IFS (or DFS) No Transactions or Turnover Taxes on Finance Application of GST to Financial Services GST/VAT to be Zero-Rated for IFS Exports
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12. Mumbai’s Physical Infrastructure
City’s Infrastructure Deficits are Serious/Critical To be an IFC: Mumbai needs to be 1 st world city World Class Power Supply – stable, reliable Transport Linkages with rest of India & World Urban Transport- Mass Transit, Road/Rail/Coast Water Supply for Residential & Commercial Use Sewerage & Liquid/Solid Waste Disposal Needs Massive Revamp of Drainage & Flood Control Telecommunications: land, cellular, broadband Investment in all much larger than envisaged World Class Project Management & Execution
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13. Mumbai’s Social Infrastructure World Class Social Infrastructure Needed in:
Healthcare Facilities of all kinds Education & Vocational Training across board Specific EVT Facilities for Financial Skills Adequate Range of Civic Organisations Sports/Recreational Facilities of world standard Cultural Facilities catering to Global tastes Media & Entertainment facilities Global Range of hotels and restaurants Facilities catering to large expatriate population User-friendly state and city governments
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14. Mumbai’s Governance Institutional Arrangements for City Governance are:
Inappropriate. Inadequate. Need Revamp City’s Governance must be independent of State City’s Management needs to be autonomous, transparent and accountable to City residents Rural electoral influences on central/state resource allocation to City need to be moderated Better co-ordination of central, state and city resources allocated to urban infrastructure Political, Administrative and ‘Popular’ Ethos needs to welcome and embrace ‘foreigners’ as part of Mumbai’s own HR base
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15. HPEC Recommendations
48 Ambitious but Clear Recommendations Along with a further 23 Sub-Recommendations Clear and Ambitious Timelines for each Together they constitute a specific Road-Map HPEC asked to opine on what to do to create IFC That has been done as comprehensively as possible It is now up to Policy-Makers to Decide Tough Political Economy Constraints on Action But one way or another an IFC will emerge Question: Will it be efficient and competitive or a “meddle-and-muddle” mutant?
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