India’s next growth engine

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: Finance Minister P Chidambaram has reiterated the government’s intention to “make financial services the next growth engine for India,” including making Mumbai an international financial centre (IFC). The committee report on the latter topic appears to be alive, with the FM indicating that a consensus is being sought on the report’s key recommendations. Much of the discussion on the report has focused on the changes required in regulation and macroeconomic policy, and on the overall goals and impacts of financial development. Another aspect of the report, however, deals with what exactly constitutes “financial services”. Unpacking this portmanteau term may be the key to progress in this sector, especially given the reform difficulties.

The IFC report lists 11 areas of financial services: fund raising, asset management, personal wealth management, transfer pricing, tax management, corporate treasury management, risk management and insurance, exchange trading of financial instruments, financial architecture for large projects, M&As, and financing for public-private partnerships. There is one additional area, which I discussed in my September 27 column—rating services. We can organise these different kinds of services more compactly to understand India’s prospects in various segments.

First, pure knowledge services are perhaps the easiest for Indian firms to engage in. Providing advice and guidance on the quality of financial assets, on tax matters, and on other issues where market participants require specialised information can be done without too much new institutional infrastructure. The main requirements are access to the appropriate skill and talent pools, and reputation. The reputations of global financial firms operating in India are already established, so it is the Indian firms that will have to find some way to compete effectively. Otherwise, the big rewards will be reaped by foreign brands, not Indian knowledge experts.