The report of the High Powered Expert Committee constituted by the Ministry of Finance to suggest a roadmap for the development of Mumbai as an International Finance Centre (IFC) was the subject of an intensive discussion on Tuesday, August 21. To the participants at the NCAER-Ministry of Finance-MasterCard India workshop, the report served as a benchmark to examine larger questions centred around the financial sector reforms. In many ways, the report itself has set the agenda for a debate broader than the brick and mortar aspects of making Mumbai an IFC. For, in the most part, the distinguished experts on the Committee (most of whom were drawn from the private sector) left no ambiguity that holistic reforms should have absolute precedence. If Mumbai is to be an IFC, then India's credibility in the eyes of the global financial community is needed.

As full capital account convertibility becomes increasingly important, the financial sector reforms assume greater significance. Speakers in the three-session event articulated the concerns of different sectors within the financial market and the economy. The lack of depth in the market, the paucity of players, the creative limitations in terms of products on offer continue to bother long-term project financing (a source of worry since this is forcing Indian companies to seek funding in IFCs overseas). Of course, the IFC question served as rudder to keep discussion on course. The sub-text of the debate was: Make Mumbai an IFC by all means, but build the edifice on solid ground.

The eminent gathering comprised capital market players, scholars, economists and bureaucrats - the presence of whom did not in the least affect the candor that prevailed. The Finance Secretary, Dr Subba Rao, said in his concluding remarks: "Financial sector reforms is an idea whose time has come". That, accompanied by his assurance of a roadmap being put in place, allowed the meeting to end on a positive note.

The proposal to make Mumbai an IFC was actually an ambitious upgrade of what was originally envisioned by government. It first came up in 2005 in the Budget speech of the Finance Minister, Mr P. Chidambaram. But he spoke of a "regional financial centre", not an "international financial centre". But the High Powered Expert Committee, initially led by Mr. Percy Mistry, broadened the vision (and terms of reference of his committee) by aiming for IFC status. That was the genesis of the "big bang" approach, which, was a subject of debate that arose frequently in the presentations of many of the Speakers at Tuesday's workshop. Dr Rao articulated the government's confidence over Mumbai's potential to emerge as a nerve centre in the global financial trade. India's emergence as a financial power would constitute, in his view, the "third wave" after she had solidified her status as an information technology power and business and knowledge processes outsourcing hub. The workshop, which was organised by the NCAER in collaboration with the Ministry of Finance and MasterCard International, drew a distinguished panel of market players, experts, scholars and representatives of government.

Dr. Rao pointed out that the report did not restrict itself to highlighting issues related to the IFC, but had a broader thrust. "It sets the direction of policy reform". As for the time frame for implementation of the Mumbai agenda, he said six months was the outer limit for starting the ball rolling.

The workshop was held in three sessions. The first session which included an inaugural began with a presentation on the highlights of the report by Dr K.P. Krishnan (Ministry of Finance). The panelists who spoke on the theme of development of markets and instruments included Dr Ajay Shah (National Institute of Public Finance and Policy), Mr Sanjay Nayar (Citi Group), Mr Joydeep Sengupta (McKinsey & Company) and Mr R. Sridharan (SBI Caps). The Session-2 focused on policy issues emerging from the recommendations of the report. The panelists were: Ila Parnaik (National Institute of Public Finance and Policy), Shubhashis Gangopadhyay (India Development Forum) and Priya Basu (World Bank). The concluding panel session comprised of Shankar Acharya (Indian Council of Research on International Economic Relations), Subir Gokarn (Crsisl) and C.P. Chandrasekhar (Jawaharlal Nehru University). Dr. Arvind Virmani (Ministry of Finance) co-chaird the second session with Mr. Suman Bery (NCAER) who also chaired the other sessions.

In the inaugural session, K.P. Krishnan, Joint Secretary in the Ministry of Finance, made a presentation on the salient features of the report. That was followed by the first working session, which had the theme "MIFC- Development of Markets and Instruments".

The speakers expressed a common feeling that the road to the IFC passes through many drawbacks remaining from the pre-liberalisation era of the Indian economy. Unless these are overcome, we may not be able to build on the inherent advantages enjoyed by Mumbai in terms of human capital and commercial acumen for it to emerge as a viable IFC.

The report talks of six advantages that India enjoys for setting up a global hub that could help it avail the advantages of financial globalisation. Firstly, India has a 'hinterland advantage' made up of a growing economy marked by rising cross-border flows. There is a view that unless India begins the process soon, these revenues (estimated to rise to $ 70 billion annually by 2015) would move to other IFCs.

The other positives cited include India's strengths in human capital, which is present both onshore as well as in the global financial market, her strong securities market and other factors like Mumbai's favourable location and the 'rule of law' that applies in a democratic country.

However, there is a flip side too. The product range in the domestic market lacks diversity. The investing community is yet small in comparison to other developing country markets. The legal system is archaic - there are clauses in the Securities Contract Regulation Act and Forward Markets Commissions Act that are quite frozen in the pre-liberalisation era. As Suman Bery, NCAER's Director-General, who chaired the entire proceedings put it: "It's a bank-centric system where the gilt markets are not allowed to express themselves".

"Low hanging fruit"

Speakers deliberated on a perception about "low hanging fruit" that needs to be plucked before overreaching for IFC status. By this was meant bonds and derivatives, for which there is enough demand and resources, but no playing field.

Many of the speakers agreed that it was high time the Ministry of Finance seriously considered implementing the R.H.Patil report, which had recommended that the government give the stimulus for a vibrant bond market.

There was near unanimity that irrespective of all other requirements, it is extremely crucial to create a strong and diversified domestic capital market. The speakers agreed on the need to concentrate on building a bond market and also develop regulations on securitisation. The development of a domestic debt market would lead to increased availability of long term funding for projects in the infrastructure sector. It would also make room for specialised players and the dividends for both players and consumers would be enormous. Incremental, small, corrective steps based on regular government-private sector interface may well be as important as the big-bang reforms. A redeeming feature about India is the high degree of freedom already available to foreign players, which is not the case with other developing countries.

The panel discussed why we don't yet have a half-decent currency market or a half-decent bond market. The discussants pointed to the need to overhaul the political economy of the discourse. Internationalisation would give a fillip to the reforms process.

Impediments

On the whole, the recommendations of the high-powered committee were seen to be desired goals. The absence of vibrant bond and liquid debt markets pose a serious impediment to raising long-term finance. Infrastructure is a major sufferer. At present the government is the only player in the bond market. Lacking a derivatives market, public institutions will not be able to invest in fixed interest rate bonds.

Whereas an effective, unified regulation, may be desirable there is also a "regulatory overlap". The need to de-legislate in order to shed excess of organisation is evident. However, there is, as yet, no unanimity on the question of having single-agency regulation for trading activities.

There hangs, above all, a "fear of finance". Safety is sought in keeping India disconnected. People always hark back to India's insulation from the East Asia crisis of 1997, which was caused by no other virtue but her isolation. The unstated logic is that modern financial products are "dangerous". Besides, the whole regulatory culture is anti-speculation.

The second working session, 'MIFC- Development of markets and instruments", was characterised by focus on the "core issue" - financial sector reforms. The publication of the expert group's report seems to have thrown up another occasion to ponder on whether "we have it in us" to be a modern, developed economy. Does India need Capital Account Convertibility by December 2008? Or, can India afford to go slow? The disagreement over the need for convertibility is not as distinct as the one over the speed at which it should be brought about.

Between 1991 and the present day, there has been a sea change in the character of the questions that surround the reforms. Today, the discourse is not over who is going to be hurt. The bulk of the objections are coming from people who want to know how much they could gain from reforms. This is relevant to Mumbai's future as an IFC. Domestic players would gain if the product variety that is available offshore were available at home. Today, the same lot has to go abroad to avail these products. Besides, the public sector financial institutions - ICICI, HDFC, etc.-who are not permitted to perform to their potential today, could give the FIIs a run for their money.

A political problem

The matter, however, is not restricted to financial players. The session's speakers held that the expert group had produced a report that went beyond all previous documents by throwing up the need to view the impasse in financial sector reforms as a political problem. A way to resolving could begin with the question; "How would Mumbai turning into an IFC help the poor of India?"

An IFC would cause a trickle-down effect that could generate incomes for the poor and reduce risks. In this context, the failure to evolve a crop insurance scheme even after two years of promising one is an example of how modern financial instruments can not be introduced without adequate supporting policy environment. Only political intervention could help change the paradigm and make the system more speculator-friendly.

It should be recognised that many IFCs have fallen by the wayside in the past. This should serve as an eye-opener, even if we laud the proposal to make Mumbai an IFC. The lesson from history lies in taking note of three preconditions: show real commitment to domestic deregulation, get rid of all government-created distortions and introduce strong financial regime governance.

Above all, there ought to be political acceptance to support strong and independent regulation. The political cover enjoyed by SEBI and RBI should match up to that offered to their counterparts in other IFCs. Naturally, this leads to the question: who is to champion the process.

The risks perceived by various stake holders may be separated into two parts - the genuine fears and those born of vested interests. The concept of "deliberate speed" was introduced during the third session, which had the theme "MIFC- Issues, Opportunities and Challenges". The speakers urged for an evaluation of the benefit-cost ratio; costs to the government and benefits to the political masters.

The "genuine fear" that needs addressing is over the regulatory risks. If the skills to regulate are lacking, then the concerns over the East Asian crisis being played out in India are valid. "Opportunistic reform" may or may not work in India. But that should not be a problem unless we are not clear about our goals.

Those who question the need for full convertibility argue that though many economists stand up in favour of liberalisation in trade and services, the unanimity less evident when it comes to liberalisation of international finance. The conservative view urges for delinking the IFC proposal from the part in the report that speaks of financial sector reforms.

The workshop ended on a positive note, thanks to the Finance Secretary's remarks, which evinced optimism for both the fructification of the IFC and the inevitability of financial sector reforms.