The Indian economy is at an interesting juncture. According to the latest World Bank forecasts, India's economy is the bright spot among all emerging and developing economies with an expected 7.3% GDP growth in 2016 compared to 7% in 2015. These are early positive signs that the economy is picking up and in the coming years is likely to hold an upward trajectory. Notwithstanding the probability of setbacks, India's growth story presents a resilient outlook. However, the pace needs to be sustained and thus, more than ever, the time is right for India to embark on a liberalization of its financial sector.

Various countries at various points in time of their economical development have taken the initiative to develop International Financial Services Centres (IFSCs) to provide International Financial Services (IFS). Over a period of time, some of the important centres like New York, London, Frankfurt, Tokyo, Hong Kong and Singapore have become leading centres for IFS.

These centres have contributed to economic growth and job creation. There are around 196 countries in the world; out of which about 80 countries have developed centres to cater to the demand of IFS. India is one of the largest countries in the world and large user of the IFS, however only recently - in April 2015 - did India announce the development of an IFSC. Despite an open economy since 1991, India’s capital account convertibility is still underdeveloped and thereby its contribution to the global financial market is considered negligible. With global markets being connected through technology, it is inevitable that India steps into the map of Global Financial Centre’s and mark its presence by setting up a successful IFSC in India. In the absence of an IFSC in India, it is estimated that India is losing around $50 billion per year (data as of 2015), which is likely to grow to $120 billion by 2025, according to India's Ministry of Finance. The development of an IFSC in India therefore will be a major game changer for the country.

The need to develop an IFSC in India

As India seeks to expand its global economic and strategic influence, promoting International Financial Services from India merits urgent consideration of policy makers, and of financial and capital market stakeholders. The primary rationale for promoting IFS in India is that the potential net benefit to the stakeholders and to the country are considerable, and therefore worth the economic, regulatory, administrative and political effort. As M Asher writes in Pragati magazine, there are “three broad imperatives for promoting IFS in India. The first arises from India’s deepening linkages and interdependencies with the rest of the world. The second concerns the need for more efficient financial intermediation, while the third concerns the human capital."

India’s reliance on foreign funds to finance its current account deficit, and large purchases of IFS from abroad, weakens its position globally, with significantly adverse implications on its economic and strategic space.

India has already become a large purchaser of IFS from the rest of the world, and loses significant revenue from the trading of the rupee and index derivatives on foreign platforms located in IFCs like Singapore, Dubai and London. In trading in rupee derivatives alone, an IFSC is expected to increase the revenue of the country by capturing approximately Rs. 1,334 crore per day or Rs. 2 lakh crore per year worth of trading that presently takes place outside of India.

Moreover, as equity and interest rate derivative markets increasingly move offshore, including to centres that 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, provident and pension fund investment policies and onshore activities to compete more effectively with offshore activities.

The operating rules for setting up banks, insurance and capital market activities in Indian IFSCs were issued in April 2015 and with that, it can be said that India took a small step in the big world of financial centres. India’s first IFSC has now been approved by the governments at GIFT City, Gandhingar and in October 2015, India’s first IFSC Banking Unit became operational at GIFT IFSC. In the short time of just 50 days the first two IFSC Banking Units at GIFT reported transactions of more than $100 million.

India’s comparative advantage

India is conveniently located to serve all time zones and has long-standing trading and cultural ties with markets around the world. To deliver benefits for the country, an IFSC needs talent, capital, excellent infrastructure and regulatory best practices.

India also enjoys lower real estate and wage costs as compared to centers like Singapore, Dubai, London and New York. It has a large pool of individuals with professional and technical skills owing to its demographic dividend. Moreover, it produces the finest brains in finance. IFSCs at London, Dubai, New York, and Singapore incidentally have a large number of Indians managing complex transactions and leading financial innovations.

India has a vast hinterland economy, which small city-based financial centres like Singapore or Dubai lack. In this respect, India is like New York (with the US as its hinterland), London (with Europe) and Hong Kong (with China).

The national ambition of India as set out by the Ministry of Finance is to make the Indian IFSC as competitive as Dubai, Singapore and Hong Kong. It is to provide benefits to both residents and non-residents in a way that will allow businesses that are currently carried outside of India to have an Indian presence. Moreover, such an influx in financial services related businesses will not only bring qualified professionals working abroad to India, but will also provide an opportunity to Indian professionals to pursue global careers while still residing and working in India.

The IFSC will allow businesses to carry out transactions that are currently not being done in India. In addition, it will also result in the re-importing of the Indian securities market and will create employment for people residing in India.

For sustainable growth and development, India can no longer afford to rely only on its manufacturing sector. It has to strengthen its services sector as well, particularly financial services and IT/ITeS. An IFSC will be an important catalyst in this process.