Towards setting up a global financial hub in India

Goa would have been an ideal venue for an international financial centre. It has booze, beaches and other things that come with these that are essential to keep the high finance crowd cheerful and engaged, when they are not crunching numbers and making money.

Goa came closest because it stayed out of the Indian Union the longest. Being a Portuguese colony, it was attached only in 1961. Who knows whether, if it had stayed out for a decade or two longer, it could have become India's Hong Kong?

Hong Kong became what it is because it had an extended immunity from the communist regime ruling the Chinese hinterland. In one of many interesting conversations I had during a stay in Singapore last year, a socialist-leaning journalist argued these so-called international financial powerhouses such as Hong Kong, Singapore and Taiwan were showpieces, heavily bankrolled by the capitalist nations during the cold war period. These outposts, that showcased wealth and good life, were supposed to be the posterboys of capitalism and act as a counterweight to the communist propaganda of the cold war era. Nothing else can explain their prosperity, this person argued. Being a sucker for conspiracy theories, I readily lapped it.

Whatever be the origin, despite the end of the cold war, these centres, especially Singapore and Hong Kong, have managed to keep themselves relevant and come into their own as global financial centres. Unlike Hong Kong, Singapore doesn't even have a hinterland.It has made one of the the entire Southeast Asian region, comprising 10 not-so-small economies.

India has the hinterland but we don't have Singapore or Hong Kong. Blame the Nehru government for annexing Goa.

The finance ministry now wants to build a Hong Kong within Indian shores. A quick reading of the discussion paper put out by the ministry suggests the proposed Finance Special Economic Zones (FSEZs) would be a kind of a 'one-stone-kills-two-birds' strategy. When you consider that the first of the proposed FSEZs would come up in the prime minister's native Gujarat, it sounds like three birds in one stone.

Let us stick to the first two. The Percy Mistry committee recommendations to make Mumbai an international financial centre have been gathering dust for nearly a decade because of the government's cold feet on capital control. The Indian Finance Code Bill, drafted by the Financial Sector Legislative Reforms Commission, over a year ago, is also on the long queue for legislative attention. The FSEZ plan can be a pilot to put both these proposals to test.

"The IFC has not been passed as law. A more limited strategy consists of enacting a Rs Finance SEZ Act', which is a subset of of the IFC, only applicable within Finance SEZs. The components out of the overall IFC which are relevant are: Micro-prudential regulation, resolution and trading," the discussion paper said. Adding, the ministry should work on setting up a 'specialised regulator'.

The paper emphasises the need for strict enforcement of laws. Critical because some entities operating in such zones tend to have the cake and eat it, too, by enjoying all benefits but not honouring any obligations. The Comptroller and Auditor General recently put the revenue loss in SEZs (non-finance) at Rs 83,000 crore over the past six years, with no significant employment generation. Let us hope the other proposal doesn't turn into a windfall for a select few.