The benefits to the country are considerable. Therefore, ensuring its success is critical
The history of the International Financial Services Centres (IFSC) is more than 200 years old. Various countries, at different points in time, developed international financial centres to provide financial services. Over the years, some like New York, London, Frankfurt, Tokyo, Hong Kong and Singapore became leading centres. These contributed to the growth of overall economy of their home countries and created a large number of jobs.
There are around 196 countries in the world, out of which about 80 countries have developed centres to cater to the demand for international financial services (IFS). India opened its economy in 1991. However, capital account convertibility has still not been achieved, and therefore its contribution to the global financial market is considered negligible. It is one of the largest countries in the world and a large user of IFS. However, it is only as recently as April 2015 that India announced the development of its IFSC. Considering that the global market is getting increasingly connected through technology-leaps, it is inevitable that India must figure on the map of the global financial centres network. In the absence of an IFSC in India, it was estimated in 2015 that the country loses some $50 billion annually—and this will grow to $120 billion by 2025.
An IFSC would bring those financial services transactions that are currently carried out abroad—by overseas financial institutions, Indian financial institutions/entities and overseas branches/subsidiaries of Indian financial institutions—to India, offering the same ecosystem as the offshore location. An IFSC, in the Indian context, can be defined as a centre that provides IFS to non-residents and residents in any currency, except the rupee, on Indian shores. The first IFSC was approved by the government of India to be set up at the GIFT City, Gandhinagar, and in October 2015, India’s first IFSC banking unit became operational there. In a short span, of just 10 months, six banks have started operations in the GIFT IFSC and have already reported transactions of around $650 million. These early transactions, in addition to the announcement of the opening up of international exchanges in GIFT IFSC, validate the need for such a centre in India.
As the country seeks to expand its economic and strategic strength globally, promoting IFS merits urgent attention from policymakers and financial- and capital-market stakeholders. The primary rationale for promoting IFS in India is that the potential benefit to the stakeholders and to the country are considerable and, therefore, worth the economic, regulatory, administrative and political effort. India’s reliance on foreign funds to finance its CAD, and large purchases of IFS from abroad weakens its position globally, with significantly adverse implications for its economic and strategic space.
The country has already become a large purchaser of IFS from the rest of the world—much larger than is realised in policymaking or commercial circles, let alone by the public. The growing importance of the rupee in the global market is well-known, with over half of the dollar-rupee market being overseas; the case of NIFTY future contracts traded overseas is also similar.
As equity and interest-rate derivatives markets increasingly move offshore, including to centres which are lightly regulated, India’s imports of IFS will grow, and its critical talent pool will decline. This trend can only be reversed by enabling—through regulatory, tax, and business policies—onshore activities to compete more effectively with offshore activities.
The IFSC will allow businesses that are currently not being done in India to be done here. It will allow qualified professionals working outside India to come here and carry out their business. This will result in getting back those businesses which were, at some point of time, conducted from India but were shifted to other countries because of various reasons. An IFSC will also establish a platform for qualified Indian professionals to pursue global opportunities by residing and working in India rather than moving to foreign countries. It will effectively try and stop the brain-drain from the country. Separately, it will also result in re-importing our securities market and will create employment for people residing here.
In India, we are used to ‘do or die’ situations (Indian cricket-fans know this better than anyone else, perhaps). As for IFSCs, India is late, but as the old adage goes, better late than never. Having started an IFSC in India, it is now important to make it a success.
The author is head, International Financial Services Centre (IFSC), Gujarat International Finance Tec–City (GIFT City)