A V Rajwade: Mumbai as international financial centre

WORLD MONEY

Ultimately, it may boil down to whether we want to compete with Dubai in terms of tax arbitrage.

While the recent report of the High Powered Committee has attracted considerable attention and media comment, the subject is hardly new. My memory is that, back in the 1980s, the Foreign Exchange Dealers' Association of India had appointed a committee under Bana Paranjpe which had examined the issue. In the mid-1990s, the Sodhani Committee on development of the foreign exchange market had recommended the establishment of OBU (Overseas Business Unit) desks within authorised dealers' branches to undertake offshore business. Nothing much came out of either of the proposals. Even today, OBUs in free trade zones can undertake a lot of off-shore banking activity which their domestic tariff area counterparts cannot do.

To be sure, the recommendations of the Committee are far more comprehensive and, indeed, ambitious. To my mind, there are two key operational issues that need to be discussed, quite apart from the acceptability of the policy recommendations in the current political climate. The first is the Committee's estimates of the income from international transactions originating in India, currently going to other centres. The Committee has estimated this at 2 per cent of the turnover. Prima facie, this seems rather high to me; in any case, out of the gross income, a significant proportion gets passed on to other centres providing either advisory services or funding. Again, whatever the scale of the revenue generated by domestic transactions, this is hardly a sufficient condition for the success of an International Financial Centre (IFC)""else, Tokyo, Frankfurt and Paris would have become IFCs ere this.

The second issue is the question raised by Percy Mistry, the Chairman of the Committee, in his interview to this paper (April 6): "Why should Ratan and Kumar go to London to raise funds for their acquisitions and consult yet another Indian there working with an international firm when the same services could be offered from Mumbai?" To my mind, Tata and Birla would go wherever they would get the most competent and credible advice and services: If this means going to, say, Timbuktu, they may well be willing to do so. In the case of Tata Steel's acquisition of Corus, the latter company was British/European, and much of the debt was to be on the books of a UK Special Purpose Vehicle. Clearly, most of the international financial services for such acquisitions would be provided outside India""even if Mumbai emerges as an IFC. As for the funding per se, it is not really necessary for any credible borrower to go outside India for it. In today's world, such financing gets arranged on email, and loans are "parked" at the centre which the lenders find most convenient and fiscally efficient. But this apart, as the Committee has emphasised, there are many Indians in investment banks, hedge and private equity funds and at the cutting edge of mathematical finance, working in all the major financial centres of the world. So are the Chinese of course, and China's home business is much, much bigger than India's. It also has ambitions of developing Shanghai into an IFC.

But to come back, Indian genius, by itself, will hardly persuade their employers to come to Mumbai""and, as the Committee has noted, it will be necessary to attract major investment and commercial banks, legal and accounting firms and so on to Mumbai, if it is to be an IFC. In large, wholesale transactions, communication and travel costs have become irrelevant. What could bring the major firms to Mumbai? Given the ruthless, numbers-driven culture of such firms, what would attract them is either regulatory or fiscal arbitrage. Regulatory arbitrage would mean that we should be willing to be more liberal than centres like Dubai, Hong Kong and Shanghai. But we do not have a culture of liberal, flexible but still effective supervision. Tax arbitrage in competition with Dubai? The answer is obvious. Will lower cost be a material factor? Here again, Mumbai's real estate is as costly as anywhere in the world, and its top finance professionals are not much cheaper than their counterparts in Dubai or Singapore.

While one welcomes many of the recommendations of the Committee, even independently of Mumbai as IFC, there are at least two where my views are different. Firstly, I do not see a fully convertible rupee as a necessary condition; London was an IFC for three decades, when the pound was not a convertible currency. Secondly, while there is some merit in the separation of the Reserve Bank's functions, there are risks in a central bank with a single point agenda""inflation. To my mind, the conduct of monetary policy also has to take account of the needs of growth/employment. Even the US Federal Reserve is responsible not only for inflation control but also for employment.