Transcript MUMBAI: An International Financial Centre [MIFC]

MUMBAI:
An International Financial Centre?
[MIFC]
High Powered Expert Committee (HPEC) Report
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1. Does India Need an IFC? -1
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From Now On – Absolutely!
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WHY?
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Because of India’s:
Inherent Size and Growth
Trade, Investment and Globalisation
Enormous Infra-Investment Needs
Rapidly Emerging Global Significance
Indian Economy: 4th 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?
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Most Likely Path for Mumbai:
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Global
Regional
National
Offshore
Niche
Phase 1 – IFC (C)
 Phase 2 - GFC (A)
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GFC? <<<< 2
RFC?
IFC? >>>> 1
OFC?
NFC?
2008-2012
2013-2020
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3. Inherent Logic of M-IFC
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An Indian IFC (in Mumbai) must be:
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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:
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Macroeconomic Policy & Management
Financial System Regulation Approach
Financial Market Structure/Integration
Current Universe of Financial Firms
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Critical Support Systems for IFS: i.e.
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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:
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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?
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Fund Raising for all types of entities:
public,
private, mixed, multilateral, voluntary
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Fund/Asset Management
Private Wealth Management
Corporate Treasury Management
Diversified Risk Management
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Exchange Trading of all kinds of EBCD
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instruments and variants
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5.2 What are IFS?
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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?
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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
21st 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:
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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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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
2005
2010
2015
2020
World Output
$44.0 T.
$63.1 T.
$ 88.6 T.
$ 122 T.
Global IFS Rev.
$ 1.1 T.
$ 1.9 T.
$ 3.6 T.
$ 6.9 T.
India GNI
$ 740 B.
$ 1.4 T.
$ 2.8 T.
$ 5.5 T.
B-o-P Flows
$ 658 B.
$ 1.4 T.
$ 3.4 T.
$ 6.8 T.
IFS Revenues
$ 13.1 B.
$ 26.1 B.
$ 62.8 B.
$ 150+ B
Indian Market
$ 13.14 B.
$ 23.61 B.
$ 47.80 B.
$ 100+ B.
Other Markets
$ 0.00 B.
$ 3.50 B.
$ 15.00 B.
$ 50+ B.
All figures in nominal USD terms
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8. A Glimpse of the Future
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9. Removing Policy Impediments
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A. Market Deficiencies
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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?
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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
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B. Macroeconomic Policy Twists
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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?
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Risks associated with Capital INFLOWS
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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
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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
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C. Financial Regime Governance
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FRG ‘intrinsic’ to financial service/product
Extant Regulatory/Ownership Regime:
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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
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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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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
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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
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City’s Infrastructure Deficits are Serious/Critical
To be an IFC: Mumbai needs to be 1st 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:
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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:
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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
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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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