India needs to relax capital controls and improve regulator and taxation regime to make the financial sector internationally competitive and check shifting of derivatives trading on rupee and Nifty to overseas locations, said a Finance Ministry-appointed panel report.
From the viewpoint of a global customer, the report said, sending an order to, say, Chicago Mercantile Exchange (CME) in the US or the Singapore exchange (SGX) is "frictionless" as there are no capital controls.
Domestic financial regulation at these locations is "technically sound" while being friendly to the goal of international competitiveness in financial services.
"For India to compete in the new globalised world of finance, our markets must match these competitors on three aspects: rationalise and ultimately remove capital controls, achieve technically sound financial regulation, and shift to residence-based taxation," the report said.
The Standing Council of Experts was constituted in June, 2013, under the aegis of the Finance Ministry with Secretary of Economic Affairs as the chairperson to assess and make recommendations on international competitiveness of the Indian financial sector.
In its first report to the Ministry, the Council has recommended carrying out the reforms process into short-term actions, medium- and long-term goals and clearly marks out the implementing agencies for them. The ministry has sought comments on the report till October 6.
Observing that there has been a sharp jump in overseas financial activity related to Indian assets, the report said the two most visible of these are the derivatives on the rupee and the market index, Nifty.
Noting that an active market for these has developed offshore, the report estimates that on these two underlying aspects alone, trading outside India adds up to a daily turnover of just under USD 20 billion (out of the total market size of USD 63 billion).
Financial services are a labour- and technology-intensive business and India is well-endowed on both these factors of production, which give it a natural advantage in being globally competitive on financial services.
"India ought to be a dominant global player in this area, with markets that are strong enough to compete with global exchanges. This should be not just on Indian assets like, say, the rupee-dollar, but also on international assets like, say, the dollar-renminbi," the report added.
