By Bernard Lunn
Tomorrow is the day India celebrates Independence from Britain in 1947.
Times are good in India. Falling oil prices, GDP growth, excellent demographics, a free enterprise Government and the comparison with a crashing market in China all make India look good. To quote the Financial Times:
“But with China’s equity market convulsed by a sell off, India finds itself the happy recipient of investment searching for safety and the developing world”.
We have already covered the story of mobile payments in India getting the traction that is missing in the West. This is a “first the Rest, then the West” story where innovation is driven by the leapfrogging to mobile and therefore the leapfrogging to mobile payments.
However to understand the scale of the Modi Government ambition for India as a financial center one needs to look at GIFT (Gujarat International Finance Tec-City). Quite simply, this is a brand new city and offshore freezone, where finance can take place outside the normal constraints of India.
The naysayers who say GIFT won’t happen may be right – only time will tell. However, give it time. New financial centers take time. Canary Wharf was ridiculed for a long time as being no competition compared to the venerable City Square Mile. So was Jersey City ridiculed as a boring back office adjunct to glamorous Manhattan.
However, GIFT as an adjunct to Mumbai does not make sense, because Mumbai ranks only #53 among the Global Financial Centers. Being an adjunct to Square Mile or Manhattan is quite different.
The GIFT ambition is to rival Singapore and Dubai as a regional Global Financial Center (#4 and #23 in GFC rank). For that to happen, 4 ingredients are needed:
- Infrastructure. This is why a brand new city was needed. Changing the infrastructure of Mumbai would have taken too long.
- Fun for expats. To be a regional center, expats have to want to move here. Great infrastructure is a given. For adventurous types, being in India will be a draw. For others, a safe environment with plenty of Western entertainment and country club facilities is enough.
- Tax. This has to be attractive for both individuals and companies.
- A compelling business reason to be there. The above three are table stakes. Without them you don’t stand a chance. For GIFT to realize its ambitions it needs something more. Companies and individuals need to have a compelling business reason to set up shop and live in Gujarat.
That compelling business reason has to be something related to that booming market in India. Sure you could trade any instrument for any market in GIFT. You could also do that in New York, London, Hong Kong, Singapore, Dubai etc. That is not a compelling business reason to set up shop in GIFT.
This is the Asian century and India (along with China) is a key driver for Asian growth. So this is analogous to New York becoming a major financial center even though London was a big investor in America. When a big new market is taking off, it pays to be close to the action. Sure, you could invest/trade in Indian assets from Singapore, which has deep ties to India. However, if you had the option of doing it in India with the same infrastructure, fun and tax benefits of doing it from Singapore you would. Being local is better. You understand nuance and meet the key players.
This is where GIFT cannot just be a standalone offshore center within India. It has to be part of a bigger story that includes easing exchange controls (which we wrote about here) and making the equity markets world class.
There is some movement on the latter front as well. The recent SEBI rule changes can be seen as a reaction to the US JOBS act, making it easier for small companies to list. SEBI is now finally doing something about XBRL, having made announcements in 2012 that were not executed on.
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