Getting back the markets we’ve exported is critical
Given how China is trying to internationalise its currency, including getting more countries to settle trade in local currencies, it is not surprising that Indian policy-makers are looking at how to increase the rupee’s international acceptability. While that will have to wait till the Indian economy acquires China’s heft, a finance ministry panel on the international competitiveness of the Indian financial sector argues that India needs to win back the markets it has exported. Just under $20 billion of trade in rupee and Nifty derivatives, for instance, takes place every day in offshore markets due to Indian rules being too restrictive or tax rates—STT and stamp duties—being too high. Given how financial services are both labour- and technology-intensive, this is a natural market for India. Apart from the forex India is losing with this market being offshored, when such facilities are not available to smaller Indian firms, this cuts into their ability to compete globally—GIFT in Gujarat is a good idea, but it is not accessible to all citizens of the country.
Apart from STT and stamp-duty levies that are not applicable in global markets like Dubai or Singapore, India’s KYC requirements are more onerous than those globally. It doesn’t help when, as happened some months ago, the government arbitrarily decided to impose MAT on FPIs. Indeed, as the panel points out, there is also the risk that a financial product can be arbitrarily banned in India, or limits be put on how much can be traded, or by whom—all of which makes investors nervous about participating in local markets. While member-level limits were increased in March 2009, these were lowered in June 2013 when the rupee weakened, and banks were barred from taking proprietary positions in these markets; this was later relaxed, but subject to other conditions.
Given finance minister Arun Jaitley has begun his budget-making process two months earlier, he has enough time to take a serious look at these issues. STT, for instance, is budgeted to yield just Rs 6,531 crore in FY16—this has to be weighed against the loss in critical markets for India. While the MAT on FPI controversy has fortunately been fixed, it is not clear if GAAR, which will be applicable from April 2017, will supersede various Double Taxation Avoidance Agreements. The finance minister would do well to take care of these concerns in his next Budget—developing robust hedging markets is critical if the rupee has to get internationalised over a period of time.