Amol Agrawal
Earlier this week, NSE announced it was partnering with Singapore Stock Exchange (SGX) to offer Nifty products in GIFT (Gujarat International Finance Tec) City by the end of 2020. This marks yet another effort to revive financial activity in India’s international finance centre.
The importance of financial centres in shaping the destiny of their respective countries cannot be overstated. London and New York are prominent examples of financial centres not just pivotal to their home economies but also the world economy.
Financial centres are not only characterised by their sheer longevity, but are also seen as displaying the political power of their nations. Post-Brexit, Paris is trying to become the leading financial centre of Europe as it looks to revive history of French dominance in world politics (see my last piece). Earlier we have also seen how regions such as Singapore and Hong Kong have based their economies mainly on finance and emerged as able competitors to the older centres.
India’s GIFT City is a combination of all these ideas, although mainly to project Gujarat as a vibrant state and develop an international financial centre to compete with Mumbai. For a student of financial history, it is really odd that Ahmedabad missed the financial centre bus. Gujarati enterprise and appetite for finance is world famous and Ahmedabad has been the centre of this world, yet it could never be a centre of finance. The city was home to the second oldest stock exchange in India which was established in 1894 (BSE was the first in 1875), even before Calcutta which was then a major financial centre. The stock exchange was established to cater to financing needs of the cotton business in the city. But barring the stock exchange, we hardly saw any other and major organized form of financing, including banks, in the city.
In that context, the city is getting another chance via GIFT city whose idea took shape in 2007. Interestingly, this was also the time when the Indian government had established a committee to review how Mumbai could be developed into an international finance centre. Before the committee’s suggestions could be looked into, the global financial crisis started burying the project.
At this juncture, one is tempted to ask the question if it would have been a better idea to shape GIFT City first as a domestic financial centre and continue to shape Mumbai as an international financial centre?
This is because Mumbai already has expertise and skills on these matters and is a natural progression as seen in case of other international financial services centres (IFSCs). The polity could have instead shifted some of the domestic activities to GIFT city taking pressure away from Mumbai. It would also have been easier for GIFT city to attract talent for India level financial activities and gradually it could emerge as an IFSC as well.
The question is moot now. In March-2015, the government announced regulations for IFSCs keeping GIFT City in mind. The idea was to develop them as Special Economic Zones (SEZ). The key features were that any financial institution (or its branch) which was established in the IFSC shall be treated as a non-resident Indian located outside India and will be allowed to conduct business in foreign currency with residents or non-residents. Barring certain provisions, nothing contained in any other regulations shall apply to a unit located in IFSC.
The Government also asked other regulators such as RBI, SEBI, IRDA etc to build a separate framework for IFSCs. RBI did come out with some guidelines and in budget 2016-17, the government gave tax breaks for firms in GIFT City.
Some banks and stock exchanges such as BSE and NSE established bases but the financial activity did not really pick up as expected. One big shock came via the downfall of IL&FS which was 50 percent partner in the GIFT city project along with Gujarat Urban Development Company Limited (GUDCL), a state entity. There were reports that Gujarat government will pick up the stake of IL&FS.
With time, the guidelines from multiple regulators were seen as a hindrance in its progress. In the interim budget 2019-20, the government suggested establishing an International Financial Services Centres Authority which will coordinate and act on behalf of all the regulators. But that is yet to take shape.
Right now, it has got a second life via SGX deal and should capitalize on it. For that it has to encourage financial houses in Mumbai (and elsewhere) to establish operations not just for name’s sake but engage in meaningful activities on a large-scale. It is only when financial activity crosses a certain threshold can one expect talent to settle in this new centre. It will be this talent that will drive future activity and make it a virtuous circle of financial development. But at this juncture, despite the SGX deal, the possibility of GIFT becoming an IFSC seems quite farfetched.
Amol Agrawal is faculty at Ahmedabad University. Views expressed are personal.
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