Whodunnit Mistry

In all there are 48 recommendations, which have been under-reported in the newspapers. These have been divided into three big themes (macroeconomic environment, second generation reforms and, of course, developing the physical infrastructure of the city) and five sub-themes (economic and fiscal strategy, monetary policy, financial regime governance, the missing bonds markets, currency markets, derivatives markets — BCD —- nexus, and weak institutions). The physical transformation of the city, however, is the easier task. Financial governance and managing vested interests who have thrived and continue to thrive on an inefficient, inward looking, almost jingoistic financial infrastructure, are where implementation of this report will face its steepest challenge.

So, there is the general critique of India’s financial sector development that shows how the walk from financial repression to financial freedom under which Mumbai can function as an IFC is a path full of devils and ghosts that we, the children of liberalisation, felt had been laid to rest in the tombs of history to be studied, analysed and avoided like the plague. Not so, says the report. Talking to lawmakers, the report notes that if Mumbai has to become an IFC, conflicts of interest that RBI manages and public sector ownership of financial firms through “balance sheet and profit-loss protection as well as high barriers to entry and competition and the resultant suppression of financial innovation” have to end (in other words, amend the Banking Regulation Act).

How? By permitting unrestricted entry of well-known global legal and accounting firms, creating an International Financial Services Appellate Tribunal covering all of finance, creating the BCD nexus, so that global investors can trade across the arbitrages that these markets present seamlessly. In the absence of this nexus, the report notes, no city can become an IFC. The other idea unions would object to is for finance ministry to allow consolidation of Indian banks and financial services to attain $500-billion strong balance sheets. In asset management, the report recommends, rightly, that the government should allow the emergence of wholesale asset management business (regulated by Sebi) such that banks, insurance companies, mutual funds, pension funds, and so on, don’t need to undertake ‘uneconomic’ operations. As many heads of mutual funds and insurance companies have told me, scale economies are the lesser problem, it is finding talent that’s killing.

If it’s go-the-whole-hog-reforms that the report carves out as the path to Mumbai-IFC, the lobbies are somewhat inverted. Unlike reforms in the manufacturing sector which were opposed by all entrenched industrialists led by the Bombay Club, financial sector reforms today have an economic logic of their own. The playing field is levelled against Indian banks and financial institutions and services firms when, for instance, a Tata Steel acquires a Corus and in the advisory and financial services that are offered, Indian players are excluded. It is these big, big deals that Indian financial services entrepreneurs want to sink their teeth into and profit from. Last year the size of this market was around $I5 billion, it is likely to rise to $20 billion this year.

Another important proposal in this report, which is something India can adopt irrespective of whether Mumbai-IFC happens, is in the approach to regulation. In financial services, unlike in manufactured goods, regulation is embedded into the product, often it is the product — no regulation, no enforcement of contract; no service, no deal. In such a scenario, the process of regulation itself has to reform. The report recommends that the Indian financial sector regulatory approach needs to make the transition from a ‘rules-based’ regime (regulator and regulated are adversaries and antagonistic) to a ‘principles-based’ regime (non-adversarial and more cooperative). In other words, it needs to move from prohibited-until-permitted to permitted-until-prohibited.

Metaphorically, the bigger issue is this: here’s a report whose recommendations have already happened — entrepreneurs will always find a way. So, the question lawmakers and policy drafters have to think about is: do we want Indian financial services to reform in the chaotic, case-by-case way that Indian manufacturing evolved but whose exports since have grown 10-fold; do we want it to go the controversial telecom way but which today offers the most competitive prices in the world; do we want it go the free market way but under the regulatory radar like IT and ITES have and capture global mindspace, marketshare? In all three, the mode of reforms was inefficient but the results show that Indian entrepreneurs have embraced the uncertainty, the risk of going global, and profited from it. The efficient way of conducting financial sector reforms is in a systematic, organised manner that enables efficiencies, creates wealth, delivers services without angst. If policymakers choose this mode, this report is surely the way to go.