G N Bajpai: A regional financial centre

India is in a position to leverage its status of being a financial hub, and make major gains.

While journeying along the path to progress, individuals, as also societies, stumble upon islands of opportunities. One such economic goldmine discernible to a perceptive eye is India as a regional financial centre (RFC). An incisive assessment of the developments in the Indian capital markets, in particular, shows possibilities of profiting from such opportunities.

RFCs provide intermediation services for people within the region and also outside. They help in optimal leveraging and sharing capabilities, competencies, and capacities among those who have as also those who do not have economic advantages.

Currently, London and New York function as international financial centres (IFCs), and Tokyo and Hong Kong, along with Frankfurt (without serious significance), as RFCs.

With the British gold standard being the cornerstone of the international monetary system, London had emerged and served as the world's financial centre for nearly two centuries.

In fact, sterling investments dominated international trade, investment, and finance right up to the First World War. The scene shifted substantially to New York soon after the Second World War as the American economy began to dominate the global setting.

The rise of Tokyo and Frankfurt can be attributed to the expansion of the economies of Japan and West Germany (Germany got reunified in 1990). Hong Kong was developed as a mid point, partly to serve regional needs and, more importantly, to counter Tokyo.

And Tokyo could not occupy a place of prominence. It can thus be safely concluded that the development of RFCs has something to do with rise of the economy, which inter alia makes India eligible. In addition, India has a time zone advantage too.

The United Kingdom has reaped the benefits of a varied nature. It has been estimated that the financial services industry, which expanded and boomed as a result of the rise of London as an IFC, accounts for one-third of all the corporate taxes collected by the UK.

It directly employs more than a million salaried persons. Four hundred and eighty-one foreign banks operate in the UK. Nearly one-third of the global foreign exchange transactions are concluded in London. Five hundred and one companies are listed on the London stock exchange, which is more than in any other exchange.

London underwrites the highest amount of marine and aviation premium. It would, however, be an exaggeration to suggest that all this has come about only because London became an IFC. However, the results of being an IFC have been immense. Similarly, New York and Hong Kong have reaped very substantial economic gains.

Rational minds (sceptics too) will raise a question: Are we ready? If one has to answer either in the affirmative or the negative, possibly the answer will be "not yet".

Developing dimensions, however, reflect that we are at a stage when the work can begin in earnest, and inadequacies can be smoothed out, while putting together the building blocks of the proposed edifice. Incidental benefits of even the preparation for becoming RFCs for the economy as a whole would be enormous.

A brief study of IFCs and RFCs to understand what helped these centres to come up and sustain their significance reveals the contribution of a number of factors like the economic freedom to work, consume, save, and invest; a sound financial system and institutions that facilitate a proper functioning of the market; the breadth, depth, and resilience of markets; computer and telecommunication linkages; long- and short-term markets in financial and commodity futures; a flexible mix of financial instruments providing options in terms of cost, risk, profit liquidity, and control; legal structure; experienced and professionally qualified people; strong economic fundamentals; stable currency; stability and continuity in economic policies; globalisation of financial markets; a high savings rate; trade surplus; and free capital movements.

It might be worthwhile to very briefly examine India's strengths. Economic and, in particular, financial sector reforms have transformed the landscape comprehensively. The Indian financial system is fairly modern, efficient, and technologically savvy. India's capital markets, on most parameters, are on a par with the developed markets.

In fact, in some of the areas like settlement cycle, straight-through processing, central counter party, dematerialisation and the real time monitoring of broker positions, and margins and automatic disabling of terminals, it has raced ahead.

In the field of risk management and the clearing and settlement system, disclosures, accounting, and corporate governance standards, India finds a place in the top quartile. India's market capitalisation has grown sharply and has shot past $400 billion""50 per cent of GDP""and the prospects of scaling greater heights are positive. Financial market executives of India have acquired the skills to handle the complexities of a globalised market.

In fact, our human capital is sought after globally and what cannot be moved is being utilised in BPOs. Even in the area of the legal structure and investor protection, we have come a long way.

The Indian economy has been traversing the path of economic reforms successfully for more than a decade. Particularly during the past six years, it has been experiencing a high rate of GDP growth and is currently the second fastest-growing economy in the world.

The outlook on the Indian economy with a medium- to long-term perspective is very positive. Today, India has one of the most stable and favourable macro-economic parameters in the world.

In fact, outside North America, Japan and Western Europe, only India has a record of sustained financial stability. Hence, India can look beyond its domestic frontiers and offer its expertise to the region.

The benefits of RFCs over a medium- to long-term duration are going to be many. Increase in market size will be the foremost one as exports to and imports from the participating countries will grow substantially. Our edge in technology, quality and costs will help reap economic advantages.

Employment opportunities in the financial sector will expand exponentially, as has happened in London, New York and Hong Kong. A sound securities market infrastructure and a large banking sector will play a more significant role in enhancing the contribution of the financial services sector to GDP, as well as tax collections.

Incidental advantages would be growth in travel, tourism, hospitality, excess capacity, and foreign exchange reserve utilisation with corresponding economic gains. One can hardly visualise any consequential downside, except that change by its very nature brings uneasiness.

The author is former chairman, Life Insurance Corporation, and former chairman, Sebi