Percy Mistry: Of discourse, garlands and brickbats

MUMBAI-IFC REPORT-I

Just 5 per cent of the comments on the report have actually taken issue with it.

The High-Powered Expert Committee (hereafter, Committee) Report on Mumbai as an International Financial Centre (hereafter, Report) has been in the public domain for over two months now. It has elicited considerable media attention. More public discussion of policy issues is needed in neutral institutional fora. For, just as war is too important to be left to the military, policy is too important to be left only to policy-makers and politicians.

Media focus on the Report has engendered a policy debate of sorts. By and large, it has been favourable. About three-quarters of media commentary has been supportive and constructive. It is gratifying to note the reactions of the finance minister and the deputy chairman of the Planning Commission (who shares the mind of the PM). Both have embraced the Report. Both seem concerned about whether there is political consensus to act on it. The FM has read and annotated it more carefully than most. That he will implement as much of it as he can in his own time, and in his inimitable way, I have no doubt.

The Report has been received enthusiastically by some icons of Indian finance, for example, M Narasimham, Vijay Kelkar and Savak Tarapore. Their reactions are invaluable. Some have asked for a high-level unit to monitor implementation of the Report's recommendations. That clarion call can only be endorsed.

Knowledgeable stalwarts apart, another tenth of the cognoscenti's reaction to the Report is of the following kind: "Yes, the report is remarkable in ambition, comprehensive in coverage, unambiguous in its many sensible recommendations. But, what's the point? No one will do anything about it. This is another report that will be shelved like its predecessors. The politics of the present coalition are not right for the UPA government to implement these bold recommendations. They are more concerned about aam aadmi than about finance, super-rich investment bankers and bonus-obsessed currency-and-options traders... Also, Mumbai's infrastructure will never improve despite much rhetoric; nor will its governance. The Committee is being naïve in articulating fine 'dreams' and believing politicians who say 'give us your best advice and leave us to take care of the politics'."

Surprisingly, this pessimism is shared by my friend Shankar Acharya. Shankar apart, this line of argument applauds the value of the Report en passant. But it goes on to negate that with a cynicism that does not serve any purpose. One cannot learn anything from it. Nor can one change anything with it. In the light of what has happened since 1992, such cynicism is misplaced.

This pessimistic reaction overlooks the reality that because of Manmohan Singh's reforms, India has come further, faster in the last fifteen years (1992-2007) than in the previous forty-four (1947-91). The much larger, more complex, real economy of India (that makes things and provides services) has changed dramatically in just fifteen years. That took only a few trade and licensing reforms. These removed artificial barriers to entry and increased the scope for industrial competition and innovation. So, why should it be impossible to change the financial sector in the next decade with the kind of reforms we propose?

That is all the Report asks, and provides evidence to justify that question. India's equity market was transformed in a mere three years! So, why should it be impossible to do what the Report recommends for capital account convertibility, bond, currency and derivatives markets, or for transforming financial regulation? Especially if there is consensus on the destination to be reached? Surely it is more important to exert Herculean efforts at generating a propulsive dynamic for reform, rather than being cleverly cynical and pessimistic about nothing ever happening.

In cooking up an IFC, the Report argues that India has all the ingredients it needs. The recipe is easily borrowed. India lacks in nothing "" not the technology, know-how, human or financial capital needed "" to create an IFC. All it lacks is: (a) proper governance of the financial regime and of the city "" which is not that difficult to remedy, providing politics permits; (b) the right approach to financial regulation "" undertaken by regulators who are not bent on preventing a future in which their draconian, dictatorial powers are diminished or eliminated "" for the wider public good; and (c) most importantly, political will and consensus in an era of unwieldy coalition politics, to get the state out of owning so much of the financial system, and making such a ham-fisted mess of it.

A further tenth of commentary suggests that the Report is broadly on target but misses the bull's eye. Such critiques suggest that creating an IFC in Mumbai is only a real estate play. The Committee does not quite see the Mumbai-IFC that way; although many local politicians and developers of proximate SEZs probably do. The Committee dismissed at the outset the notion that an IFC in Mumbai should be an offshore centre located in an SEZ, with spanking new infrastructure, dealing only with non-resident clients in foreign currencies that were fully convertible. But proponents of this idea do not appear to have taken fully into account how such an offshore centre might be regulated. Would Indian regulators be keen on a bunch of other home country regulators involving themselves in overseeing transactions that involved their currencies and corporations? Would that not overlap irritatingly with Indian regulators overseeing Indian and established foreign firms undertaking such transactions in an offshore centre?

The Report states categorically that Mumbai's crumbling infrastructure is not at all amenable to the emergence of a credible IFC. Yet, even with its obvious dilapidation, a wide range of international financial services (IFS) could still be offered to Indian clientele. But that could only happen if the structure/performance of the financial system and its regulation were reformed. It would not happen if the plethora of unnecessary and counterproductive barriers, prohibiting IFS from being offered in India "" and prohibiting the world's major financial players (and their lawyers and accountants) from operating freely in India "" were not lowered or removed. Obviously, to serve global clientele, Mumbai's infrastructure would need to be of a standard similar to Singapore and Dubai. Other IFCs have traffic jams; but they have better buildings, roads, power, water, communications, drainage, flood control, disaster management and so on.

Surprisingly, only the remaining 5 per cent of commentary actually takes issue with the Report. The clearest exemplar of this is Shankar Acharya who wrote a clever piece on the 'Mystery' Report not so long ago in Business Standard. This type of reaction, especially when put forward with such formidable powers of persuasive erudition, needs to be taken seriously! That is precisely what I attempt to do in the last of this series of six articles.

The author was the chairman of the Committee that wrote the Report. This is the first in a six-part series that will appear every week