Promoting International Financial Services from India will further its geo-economic and geo-strategic interests.
As India seeks to expand its economic and strategic space globally, promoting International Financial Services (IFS) from India merits urgent consideration of policy makers, and of financial and capital market stakeholders. The primary rationale for promoting IFS in India is that the potential net benefit to the stakeholders and to the country are considerable, and therefore worth the economic, regulatory, administrative and political effort.
There are three broad imperatives for promoting IFS in India. The first arises from India’s deepening linkages and interdependencies with the rest of the world, which may be termed the geo-economic imperative. The second concerns the need for more efficient financial intermediation, which may be termed efficiency imperative, while the third concerns the human capital imperative.
The geo-economic Imperative
This imperative arises due to the possible adverse consequences for India’s economic and strategic space and policy choice if the IFS are not vigorously promoted to expand India’s service exports, and contain imports of IFS. In 2011, India’s GDP at market prices was USD 1.85 trillion (USD 4.53 trillion on Purchasing Power Parity basis). At nominal rate of increase of 12 percent (6 percent real annual GDP growth and 6 percent average annual inflation), nominal GDP will be USD 3.7 trillion by 2017, and USD 7.4 trillion by 2023, just 12 years away.
It is not just the size of the GDP, but also infrastructure needs and the Public Private Partnership (PPP) method used for infrastructure projects, which will sharply increase the demand for domestic and international financial services. The 2011 Report of the Government of India appointed Committee on Infrastructure projected that between 2012 and 2013, India will need to invest INR 39,187 billion (USD 835 billion) valued at 2009-10 prices, equivalent to 48 percent of GDP to meet urban infrastructure needs alone. Many of these investments will utilise the PPP method.
India’s current and capital receipts and payments to GDP ratio has increased from an average of 83.5 per cent during 2003-04 to 2007-08 period, to 109.6 per cent in 2011-2012. India’s international trade in goods and services averaged 40.8 percent of GDP during the 2003-04 to 2007-08 periods, rising to 55.5 percent of GDP in 2011. India’s deficit in 2011 was USD 145.1 billion, equivalent to 7.8 percent of GDP, an unsustainable level. While exports have been declining in recent months, imports have continued to rise. India’s current account deficit (CAD) in the balance of payments for 2012-2013, projected to be 4.4 percent of GDP, helped by remittances, and other inflows, is a major structural risk, a significant limiting factor in perusal of more expansive monetary policy. India’s reliance on foreign funds to finance its CAD, and large purchases of IFS from abroad weakens its position globally, with significantly adverse implications for its economic and strategic space.
India has already become a large purchaser of IFS from the rest of the world; much larger than is realised in policy-making or commercial circles, let alone by the public at large. Mobis Philipose (Mint, January 7, 2013) has reported the growing importance of INR in the global market; with over half of the dollar-rupee market being overseas. In NIFTY future contracts, role of Singapore’s Exchange (SGX) is growing worryingly.
As equity and interest rate derivatives markets increasingly move offshore, including to centres which are lightly regulated, India’s imports of IFS will grow, and its critical talent pool will decline. This trend can only be reversed by enabling, through regulatory, tax, and provident and pension fund investment policies, onshore activities to compete more effectively with offshore activities. India must encourage development of innovative financial products relating to pensions, insurance, project financing and other activities; and encouraging offshoring of actuarial and other services from India.
More efficient financial intermediation
Promoting IFS in India has potential to improve the quality of financial intermediation in India through better benchmarking against international practices. According to the 2011 Financial Development Report by the World Economic Forum, India ranked 40 out of 62 countries, suggesting considerable room for improvement.
India’s high growth domestic savings rate (32.3 percent GDP in 2010-2011) needs to be intermediated into gross domestic investment (35.1 percent of GDP in 2010-2011) to improve capital productivity and thereby India’s trend rate of economic growth. India’s financial sector has considerable scope to grow. Thus, its mutual fund industry assets of USD 90 billion in 2011 were equivalent to only 5 percent of GDP, and paltry 0.4 percent of global assets under management. The insurance penetration rate (measured as a ratio of premium to GDP) for life (3.4) and for non-life (0.7) are relatively low; and have not exhibited strong upward trend.
India needs to obtain scale and depth in asset management, and in insurance industries.
The human capital imperative
This involves creating a conducive environment for attracting individuals (and organisations) with technical and professional skills involving financial and capital markets, particularly in quantitative finance. To facilitate this task, numerate labour force providing good quality para-professional accounting, book-keeping, compliance and other tasks needs to be trained locally.
Significant presence of Indian diaspora in global financial and capital market related organisations represents an advantage which needs to be leveraged. Requisite social and physical amenities, including affordable housing, educational, health, and transport facilities will be needed for such leveraging; and for developing paraprofessionals.
The GIFT project
Promotion of IFC in India could be in several complementary locations. The GIFT (Gujarat International Finance Tec-City Company Limited) project, spread over 673 acres, with the estimated project cost of INR 60,000 corers (USD 11 billion), is an initiative which merits to be considered a national priority project. It is jointly promoted by Gujarat Urban Development Company Limited (GUDCL) and Infrastructure Leasing & Financial Services Ltd (IL&FS).
The project is envisaged as a self- contained city, with domestic activities zone and Special Economic Zone (SEZ) for promotion of IFS. It claims to leverage Gujarat’s strengths and attract domestic financial global and capital market players, including offices of multilateral institutions. GIFT management could consider encouraging professional bodies in finance, actuarial studies and others to be easily accessible to Gujarat-based professionals. It could also encourage multilateral organisations and foundations to locate in GIFT. As GIFT project progresses, it could help spur greater focus on improving efficiency and competitiveness by other locations, such as Mumbai, and Chennai. Such healthy contestability is consistent with focus on complementarities among different locations in promoting IFS in India.
In the global IFS market of the twenty-first century, competition is driven by rapid innovation in financial products, services, instruments, structures, and arrangements to accommodate and manage myriad requirements, risks, and a ceaseless quest for cost reduction. The GIFT project represents one of the initiatives, which if pursued competently as a project of national importance, could expand India’s geo-economic and geo-strategic interests. The cost of not promoting IFS in India in terms of national resilience and strength will be unacceptably high.