April 23, 2007
Road map for making Delhi a financial centre
By Anand Kumar
MUMBAI may be Indiaâs financial and commercial capital, but planners and government officials here and in Delhi dream constantly of the city emerging as an international financial centre (IFC).
Earlier this month, an official, high-powered expert committee, virtually threw cold water on these fantasies, and also prepared a road map for the government to follow, if it wants its dreams to materialise.
Percy Mistry, a former World Bank economist â who had advised Prime Minister Manmohan Singh even in the early 1990s, when he was the finance minister and had initiated the reforms process â has not minced words in his critique of financial sector reforms in the country.
Government leaders â both at the centre and in the state government here â have been talking of Mumbai emerging as an IFC and one of the most significant finance hubs between London and Singapore. The committee was given the task of identifying the problem areas that need to be tackled to ensure Mumbaiâs emergence as an IFC, in league with London, New York and Singapore
The committee pointed out that India accessed âinternational financial servicesâ amounting to $13 billion 2005, and the figure is likely to jump to between $50 billion and $70 billion in just about eight years. If India does not carry out major financial sector reforms, it would end up losing all these revenues to other IFCs, notably Dubai and Singapore.
Percy Mistry, who also has his own private investment advisory firm in the UK, believes that India would lose nearly $20 billion every year if it delays opening up the financial sector. Exports of financial services from India can easily overtake IT, communications and telecommunications (ICT) sector exports by 2025, if the right steps are taken now, he says.
Citing an example, Mistry notes that Indian takeover tycoons â including Ratan Tata, who recently acquired Corus of the UK for $13.65 billion, and Kumar Mangalam Birla, who is acquiring Americaâs Novelis for $6 billion â are forced to raise funds abroad because of the lack of depth of Indiaâs financial markets.
The committee has called for key changes in financial sector governance and public debt management. It wants the government to speed up the process of full capital account convertibility of the rupee within the next two years, the governmentâs exit from ownership of financial firms, reduction of its equity stake in public sector banks, the setting up of a robust derivatives market. a currency spot market, opening up Indian capital markets to hedge funds and alternative investment vehicles.
With general elections just two years away, and the Congress facing an uphill task in the ongoing elections to the Uttar Pradesh assembly elections, it is unlikely that the high-powered expert committee report would be acted upon in the near future.
The United Progressive Alliance (UPA) government has already started slowing down the reforms process, and with elections round the corner â and pressure building on the Manmohan Singh government from leftists within the Congress and from outside supporters â the report is likely to be moth-balled.
Finance Minister P. Chidambaram, who has been eager to raise Mumbaiâs international profile, is expected to visit the city this week to push the state government to pursue reforms. One of the biggest stumbling blocks is the presence of an antiquated law in the stateâs statute books â the Urban Land Ceiling Act (ULCA).
Most Indian states have dumped this archaic law, introduced in 1976 when there was an Emergency in the country. The ULCA, a regressive piece of legislation, resulted in acute shortage of land and housing in Indian cities, and also led to rampant corruption.
The federal government has directed the Maharashtra government to scrap the law to avail of benefits under its Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Though the state government is keen on getting funding from the JNNURM, there is intense political pressure on it from vested interests not to scrap the legislation.
The ULCA is valid only in major cities like Mumbai, where there is a huge premium of scarce land. The ULCA encourages rent-seeking politicians and bureaucrats to block proposals for major projects; while professional developers refuse to cut corners and bribe politicians and bureaucrats, crooked ones manage to get official clearances for their projects.
The IFC committee report has emphasised the need for reforms in Mumbai, and has also called for dramatic improvements in the city infrastructure. But bitter political wrangling is jeopardising many major projects in the city, and the government lacks the political will to bring about changes.
Maharashtra is currently facing an acute power crisis, with a daily shortage of over 6,800 MW. Most rural areas get power for around four hours daily, and cities face power-cuts ranging from eight hours to 16 hours. Mumbai, which has been self-sufficient all these years, is likely to face cuts from this year, as politicians from other cities have been demanding load-shedding in the city.
The state government, which has a debt burden in excess of a trillion rupees, is in no position to put up new power plants, or even buy power from other states. Chidambaram will indeed find it difficult to extract any more promises for reforms from the state chief minister, whose government will also have to face the electorate in about two years.
THE other major stumbling block for reforms in the financial sector is the opposition from government institutions, including the Reserve Bank of India, the countryâs central bank, other financial sector regulators, and the state-owned banks and insurance companies, and trade unions.
There is multiplicity of regulators in the financial services sector. The RBI is the banking regulator, the Securities and Exchange Board of India (Sebi) is the capital markets regulator, the Insurance Regulatory and Development Authority (IRDA) looks after the insurance business, and the Forward Market Commission handles commodities.
But many of the roles overlap. The RBI is not able to regulate the co-operative banking sector, as there are other state-level regulators.
The committee is critical about the absence of âBCD (bonds, currency and derivatives market) nexusâ in India. The bond market in India is shallow, and dominated by the government and its inefficient institutions. The government is the largest issuer of bonds, and also the largest investor.
The expert committee notes that there can no successful IFC in the absence of a BCD nexus. While the bond market is dominated by the public sector, there is a glaring lack of currency and derivatives markets as well.
To activate the BCD markets and to encourage private sector participation would require a lot of legislative changes. The UPA government is finding it extremely difficult to even carry out basic financial sector reforms, including opening up the pensions fund business, or letting international firms hike their stake in insurance companies.
Key financial sector reforms have been stonewalled by the left parties, and the UPA government has now virtually given up on getting the legislation passed. Both the Congress and the Bharatiya Janata Party (BJP) are agreed on the importance of these crucial reforms, but in Parliament the two sides have refused to join hands and take on the leftists and getting the bills passed.
The BCD reforms would have to wait for a new government after 2009. But the committee has warned the government that any delays in ushering in these changes would benefit other potential IFCs, including Dubai, which are aggressively pushing ahead with reforms.
Unfortunately for Mumbai, a two-year delay could mean its being left behind, as even Indian industrialists acquiring companies abroad, would not have the patience to wait so long. The world is moving at a rapid pace, but Indiaâs politicians and bureaucrats appear to be marking time in a different era.
http://www.dawn.com/2007/04/23/ebr11.htm
