India as GFC

8/8/2019 India as GFC

1/13

A Report on Can INDIA Become The Global Hub For Financial Services Page 1

Group-9

A Report onCan INDIABecome The

Global HubFor FinancialServicesSubmitted to Prof. Murty

10/6/2010


2/13

CONTENTS Introduction ..3

Financial services..3

Indias competitive advantages.4

Key Weaknesses....6

A Roadmap for Reform.7

Conclusion.9

References.10

Facts, Figures and Abbreviations..11


Group:9

Gaurav Agarwal(10)

Mandeep Singh

(11)

Richa Sharma (21)

Prashant Chauhan(37)

Saurabh Bose (41)

Pankaj Khatri (58)


3/13

INTRODUCTION

Historically, finance has always been international in character; capital has rarely been immobile. Money has moved freely across borders for all civilization. Worldfinance has since been reverting to its natural state with the removal of capitalcontrols and the gradual re-integration of national capital and banking markets; but

this time on a global scale.

Incremental growth in the global international financial services market is now being driven by the growing demands of China, India and ASEAN. With itsstrengths in human capital, a globally powerful IT services industry, and its ownhinterland, India has many natural advantages for competing successfully in thismarket.

FINACIAL SERVICES

Financial services refer to services provided by the finance industry. The financeindustry encompasses a broad range of organizations that deal with themanagement of money. Among these organizations are banks, credit cardscompanies, insurance companies, stock brokerages, investment funds and somegovernment sponsored enterprises. In India ministry of finance is the policymaking body. Reserve Bank of India (RBI) and Stock Exchange Board of India(SEBI) are the two regulatory bodies.



4/13

INDIAS COMPETITIVE ADVANTAGES

Indian economy

India has grown rapidly and its economy has globalised. As India grows, itglobalizes faster. That happens through the increased share of trade andforeign investment in economic activity. Indias GDP growth rate of tenyears average is 7.0%. Its exports are US$68.6 billion in FY2009 (30%growth) and forex reserves are US$116 billion. Current and capital accountflows invariably necessitate purchases of IFS. For example, current accounttransactions involve payment services, credit enhancement, currency risk management, etc. Capital account flows involve purchase of investment

banking, legal, accounting, risk management, research and other similar

services. Interest rates are also declined by 6.5% in last five years. Whileshort term debts are only 1.2% of GDP.

Hinterland advantage

The growth of the Indian economy and more rapid growth of cross-border financial flows have created substantial local demand for IFS. This driversupports the development of skills, and generates economies of scale on the

part of financial firms operating in Mumbai. China has the same hinterlandadvantage. New York has the North American economy as its hinterland.London has the even larger EU economy, as well as its own nationaleconomy, to serve. Singapore has a limited national economy. But it is thefinancial epicenter of an ASEAN regional economy that is almost as large asChina and larger than India. Dubai does not have that kind of national or



5/13

regional economy. But it is located in a region that is generating enormousfinancial surpluses for investment abroad.

Human Capital

India has four strengths by way of human capital endowments that give it acompetitive edge over Shanghai, Singapore and Dubai:

The extensive use of English, which is the lingua franca of international finance.

Generations of experience with entrepreneurship, speculation, tradingin securities and derivatives, risk taking, and accounting. Indeed theability to provide IFS seems to be genetically coded into Indianfinance professionals.

Strong skills in information technology and quantitative thinking. Individuals of Indian origin play a prominent role in the top 20 global

financial firms. They are well-positioned to intermediate between the business strategies of these vital firms and the genuine strengths andweaknesses of India as an IFC.

Location

Mumbai is well located in being able to interact with all of Asia and Europethrough the trading day. Apart from the Americas, transactions with most of world GDP can occur in daylight. Given the remarkable and growing role of London in providing global IFS today, India has the advantage of having a45 hour overlap with London time. There is no IFC operating within anhours variation of the Indian Standard Time zone. India has an edge over Shanghai, but not over Dubai, in this respect.Democracy and Rule-of-law

Properly functioning financial markets require a constitutional basis andmachinery for system governance that is stable, reliable, resilient andflexible; i.e. one that reduces future political risks and uncertainty. Globally

credible financial systems need to be rooted in legislative, judicial, andregulatory frameworks that adhere to rule-of-law and respect/protect property rights; in principle and in practice. India has proven strengths inupholding liberal values, protecting property rights and maintaining political



6/13

stability. It fares well compared with China, Singapore or Dubai but doesnot match London or New York.

Mindshare

High GDP growth, the BPO/KPO phenomenon, and the success of Indiansin global finance all over the world, ensure that India has significantmindshare at policymaking levels in global financial firms. India has anedge over Singapore and Dubai, and perhaps even over China, in thisrespect.

Strong securities markets and advanced trading platforms

India has the foundations for providing global IFS by virtue of its dynamic,technologically capable securities trading platforms in the NSE and BSE.These are the 3rd and 5th biggest exchanges in the world measured bynumber of transactions. India has an edge over China and Dubai, but notover Singapore, in this respect.

KEY WEAKNESSES

The two key strategic institutional (or structural) key weaknesses in Indian financethat impede IFS production:

Missing Debt, Currency, and Derivatives Markets

The most critical financial market components missing in India are: a properly functioning bond market, a currency market and a derivatives

market for currencies and interest rates. These three interlinked markets aretermed collectively as the bond currency- derivatives ( BCD ) nexus in thisreport. Six specific deficiencies in this respect include the absence of: (a) aliquid and efficient sovereign bond market with an arbitrage-free INR yieldcurve, (b) a wide range of essential derivatives on INR interest rates, (c) a



7/13

liquid spot market for INR denominated corporate bonds, (d) creditderivatives on credit spreads or credit events, (e) a liquid currency marketand (f) a full range of currency derivatives.

An inadequate universe of institutional investors

The second deficiency in India is a universe of institutional investors thathave the size, visibility and capability of those in established IFCs. The

progress made so far with liberalization has been based largely onspeculative price discovery by non-institutional investors in equity markets.Other segments are dominated by state-owned entities which are bound byrestrictive rules. Banks and insurance companies are restrained, if not

banned, from undertaking risk hedging activities and other kinds of sophisticated business due to regulatory restrictions. Consequently their assets are growing too slowly.

A ROADMAP FOR REFORM

The following are the priorities for reform:

Macroeconomic (monetary and fiscal) management.

The asymmetric reality highlights the importance of redoubling efforts inreforming policies, legal and institutional arrangements to achieve andsustain a high growth rate (810%) for the economy in general and thefinancial sector in particular .Creating a vibrant, competitive IFC will require, as an integral backdrop,success in meeting the legal commitments entered into by the Governmentof India, and the governments of individual states, to reduce the consolidatedfiscal deficit on the timeline announced. In addition, it will require (a)reducing the total public debt/GDP ratio to more acceptable levels; and (b)

pursuing sound fiscal and monetary policies thereafter.Strategy for public debt financing.



8/13

Traditionally, India has eschewed bond issuance outside the country,fearing the currency risk that arises with issuing forex bonds while havingINR revenues. This risk of original sin does not arise if INR denominated

bonds are sold to meet foreign demand for such debt. Therefore weadvocate opening up fully to foreign investment in INR denominatedsovereign bonds issued by GOI. It further recommends that no limits shouldapply to purchases by foreign clients of INR denominated corporate bondsor bonds issued by sub-sovereign entities (states and metropolitanadministrations). In addition, we believe that the function of a public debtmanagement office should be placed in the Ministry of Finance rather thanin a regulatory institution to avoid any perceptions of conflicts-of-interest.

Capital account convertibility

The convertibility question is critically linked to the possibility of acurrency crisis, which India has successfully avoided over 19912007. Thisdiscussion needs to be illuminated by three key points. First, the presentIndian policy configuration is not a consistent one, given a peggedexchange rate and attempts at having an autonomous monetary policy whilehaving significant capital account openness.This has, in the past, led to potentially destabilizing one-way bets for foreign capital. Second, it is clear that if IFS export is the goal, this isincompatible with capital controls. Third, the growing integration of Indiainto the world on the current account and the capital account is giving defacto convertibility in any case.

Taxation of IFS and financial Transactions

We recommend a rational fair tax system for IFS which is competitive byinternational standards. A recommendation to include financial servicesunder Goods and Services Tax (GST) regime with the simultaneousremoval of all central and state transaction taxes including the Securities

Transaction Tax (STT), stamp duties, etc.Improving the performance of the legal system for finance



9/13

We believe that significant improvements need to be made in the Indianlegal system in resolving disputes, adjudicating settlements and enforcingfinancial contracts in real time. If that does not happen the prospects for India emerging as a global hub for financial services, or aspiring to becomeGFC, will be irreparably damaged.

Principles-based Regulations

At present financial regulations in India is fragmented and rules-based. It isover-perspective and restrictive for managerial discretion. We recommendthat rules-based regulation in India be replaced by principles-basedregulations. We also recommend that a new united system should be draftedto bring together, under a single umbrella, all aspects of financial services:i.e. securities trading, banking, derivatives, insurance and commodity-finance.

CONCLUSION

We have chosen London, New York, Singapore and Dubai to look at closely because: (a) the first two epitomize what a fully-fledge GFC is, and what Mumbaishould aspire to become as it matures; and (b) the latter two offer immediatecompetition in Indias own neighborhood of a kind that may compromise theemergence of Mumbai as an GFC.

Swift implementation of the recommendations we suggest, would orientate Indian

Financial firms towards achieving IFS export competitiveness. Theserecommendations constitute a dovetailed agenda that would be wise for India tofollow in any event regardless of the arguments for or against a Global Hub for Financial services.



10/13

REFERENCES

Insurance Regulatory and Development Authority . (n.d.). Retrieved October4, 2010, from www.irda.gov.in:http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1

Investment Commission . (n.d.). Retrieved October 4, 2010, fromwww.investmentcommission.in:http://www.investmentcommission.in/financial_sector.htm

http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1http://www.investmentcommission.in/financial_sector.htmhttp://www.investmentcommission.in/financial_sector.htmhttp://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1


11/13

Reserve Bank Of India . (n.d.). Retrieved October 4, 2010, fromwww.rbi.org.in: http://www.rbi.org.in/scripts/WSSViewDetail.aspx?

TYPE=Section&PARAM1=2

Mckinsey Report . (n.d.). Retrieved October 4, 2010, from www.mckinsey.com:http://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_ 2010.pdf

FACTS, FIGURES AND ABBREVIATIONS

http://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=2http://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=2http://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdfhttp://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdfhttp://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=2http://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=2http://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdfhttp://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdf


12/13

ASEAN Association of South East Asian Nations

IFS International Financial Service

IFC International Financial Center

BPO Business Process Outsourcing

BSEBombay Stock Exchange

INR Indian National Rupees

GOI Government of India

NSE National Stock Exchange

SEBI Stock Exchange Board of India

RBI Reserve Bank of India

GDP Gross Domestic Product

FOREX Foreign Exchange

EU European Union

KPO Knowledge Process Outsourcing



13/13


India as GFC

Documents

Transcript of India as GFC