It is true that today there is very little awareness about international financial services (IFSs), which refer to cross-border services that deal with the flow of finance and financial products—be it the raising of funds such as debt and equity, risk management, asset management, mutual/pension funds, corporate treasury operations and highly developed derivatives, or other products. The current scenario is not unlike what was true many years ago for the IT and ITeS sectors. While companies such as TCS and Infosys understood the game, it took regulatory changes in the telecom sector before India could claim global leadership. In similar fashion, Indian finance companies foresee that India’s natural advantage in the sphere of IFSs could be a big money spinner. But the current structure of financial governance is an obstacle.

Send your comments to the columnist Name Your E-Mail Your Comments

The report primarily seeks to set right all that prevents IFSs from being provided from in India for either foreign or domestic consumption. The recommendations relate mainly to changes in financial markets and their regulation so that Indian companies do not have to turn to London or New York.

So, why is a country that usually clamours for import substitution and export promotion, wary of this report? Because while the report is ostensibly about IFSs, it has implications to our financial sector’s architecture. It recommends doing away with the licence permit raj in finance and opening up the sector to the scary world of high finance, with global links and complex computer software. Indian finance companies are not afraid of these challenges, and are, in fact, asking to be allowed a piece of this pie. The current regulatory framework, instead of protecting domestic firms, stops them from competing with global financial firms.

There could be a number of reasons why the Mistry report may not be implemented. The most important of these is the state of India’s political economy. Recall that when Jagdish Bhagwati recommended trade liberalisation to India in the 1960s, there were interest groups that benefited from protection and would not hear of it. It did not matter whether it was good for the country or not. Domestic firms were cosy in their tariff-walled enclosures, and had the economic and political clout to stay cosy. Infant industries long outlived their infancy, yet tariffs were not brought down.

It is striking that the report has been signed by the who’s who of Indian finance, and practitioners are not known for making academic points. Their wish lists are usually ones that can be implemented

Had the Mistry report been signed by a bunch of academic economists, one could have wondered whether they had recommended a first best solution, as economists should, and why the real world is not going to like it. But it is striking that the report has been signed by the who’s who of Indian finance. And practitioners are not known for making academic points. Their wish lists are usually ones that can be implemented. They do not waste time chasing dreams.

So, if the who’s who of Indian finance support the report, who opposes it? Who loses? Is it Indian industry?

Indian companies are unable to buy IFSs in India—why would they prefer to go to London or New York for them? By the year 2015, the demand for IFSs by Indian companies is projected at $50 billion. That’s huge demand, and Indian industry would surely like the supply to be conveniently cheap and local.

If Indian manufacturers and finance companies gain, which interest group would want to block the Mistry recommendations? Who are the domestic counterparts of American blue-collar worker unions of the 1960s’ opposing tariff reductions and Japanese cars, or of white-collar workers opposing outsourcing to India more recently?

If there are any losers, it is Shanghai and Dubai, which might try to find friends in India who would do some fear-mongering to keep Mumbai from outcompeting them. The fear of capital account convertibility may be a useful instrument in this game.

Then, of course, there are the usual bureaucratic hurdles. It is interesting that hardly anyone is saying that the report should not be implemented, or that it is not a win-win prospect. Instead, commentators seem to be saying that it is too much to ask.

Finally, there is the question of consensus on the speed with which India must move towards capital account convertibility. Differences on this issue underlie the approach different commentators take towards the Mistry report. Yet, as India globalises, the consensus on convertibility is likely to strengthen. It’s merely a question of time: no one really believes that India can go back to being a closed economy again.

—Ila Patnaik is senior fellow at National Institute of Public Finance and Policy, New Delhi. These are her personal views