Prime Minister Narendra Modi’s dream International Financial Services Centre (IFSC) project at Gujarat’s GIFT City has taken off, on paper, with the unveiling of regulatory guidelines for firms wanting to operate in what would be India’s first such exclusive hub. True, it will take some time before global fund managers and other financial services players actually set up shop. So far, only NSE and BSE have signed MoUs with GIFT City to establish international exchanges for trading in equities, debt securities and currency, interest rate and index-based derivatives.
The basic objective of creating an IFSC physically located in India makes sense. It is ironical that today, the average turnover in the NSE’s Nifty index futures at the Singapore Exchange is about half that traded on the NSE itself. Likewise, the estimated daily offshore market in rupee derivatives is several times the volume of exchange-traded currency futures within India. The fact that India-related financial contracts at Singapore or Dubai are denominated in dollars — providing a natural hedge against rupee fluctuations — isn’t the only reason for the flight of trading out of the country. It eventually boils down to India having no equivalent of a New York, London, Singapore, Hong Kong or Dubai, offering the ecosystem or regulatory environment for producing financial services on a global scale. Unlike Dubai or Singapore, India is also a consumer of financial services. To the extent it can also be a producer, Indian companies needn’t go to London or New York to raise money, just as fund managers could well invest in India without sitting in Singapore. That, in turn, opens up access to global finance for even relatively smaller companies here. Knowledge about them is obviously enhanced through physical proximity, which is what Hong Kong has enabled vis-à-vis China.
It is a moot question if GIFT City — in a state that is predominantly a manufacturing powerhouse — can be the IFSC that Mumbai was envisaged as. An IFSC requires providing world-class infrastructure to attract global financial services providers. This may be more likely in a brand new smart city. But the Centre should refrain from offering tax exemptions and other distortionary sops. The choice of location must not be solely guided by tax advantage. Superior infrastructure and the larger advantage of servicing financial requirements from within should be an Indian IFSC’s USP.