India’s First Finance SEZ (IFSC)


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Finance Minister Arun Jaitley in April 2015 inaugurated India’s first finance SEZ: International financial Service Centre (IFSC) at the Gujarat International Financial Tec (GIFT) City.

The  IFSC, in the SEZ area of the GIFT City, 20 km from Ahmedabad, could house major global exchanges and financial institutions catering to international markets. Geographically, the city is uniquely placed between Europe and Japan. The government hopes this will help the IFSC act as an alternative international exchange on a par with the Singapore Exchange (SGX) and the Dubai International Finance Centre (DIFC). Companies operating outside the SEZ area of the GIFT City are expected to provide in the domestic area banking, financial and insurance services to the Indian shore. The city is also being touted as India's first greenfield smart city - its first phase is likely to be fully operational by the end of 2016, according to GIFT City Company Ltd officials.

Of the total proposed area of 868 acres, the Gujarat government has already transferred 673 acres to a special-purpose vehicle set up in a joint venture with IL&FS. The proposed 62 million sq ft of built-up area in the GIFT City is to be built in three phases - 12.6 million sq ft has already been allocated, earning the city a total revenue for Rs 1,010 crore so far. But while physical infrastructure, such as central command centre, waste-disposal management, district-cooling system and a gas-based power station, are already in place, only two towers have come up with only six firms currently operating in the area.

Of the 12.6 million sq ft already allocated, the total allotment in the SEZ area has been only 3.5 million sq ft. This includes an allotment of 3 million sq ft to IL&FS and 0.25 million sq ft each to real estate developers Hiranandani and Brigade Enterprise. This implies over 72 per cent of the total allocated area is outside of the SEZ. As the financial SEZ is the anchor of the GIFT city project, the lack of interest is surprising.

Concept

This concept is not new in India because in 2007 Percy Mistry Committee Report had explored the idea of setting up an IFSC in India and had suggested the setting up of International Financial Centre in Mumbai. The report recommended for the reform of the Indian financial system and suggested that India had the potential of competing with the likes of London, and New York. However, the plan was subsequently abandoned due to the 2008 global financial crisis.
Globally, the concept of IFSC is not a new concept. International financial services are being provided by various International Financial Centres (IFC) worldwide, amongst which centres located in London, New York, Singapore and Dubai are the prominent ones. London has been a significant IFC for over three centuries now, whereas New York rose to eminence with the growing importance of the US economy between late 19th century and early 20th century and also due to the persistent American innovation in the field of finance. IFCs in Dubai and Singapore are relatively recent.
 
Why a Finance SEZs in India?

Finance is one of the world’s biggest industries. The bulk of global financial services production takes place in a few international financial centres: New York, London, Singapore, Hong Kong and Tokyo. Finance production in these cities creates high wage jobs and wealth. In addition, high quality financial services supports high GDP growth in the hinterland. As an example, the presence of Hong Kong as an international financial centre assists Chinese companies.
India is a large user of financial services, by virtue of a large and growing GDP and a high rate of investment and savings. At present, India is consuming financial services produced onshore as well as offshore. India requires sophisticated financial services to fuel growth in the future. The financial system determines the allocative efficiency of the use of capital; a sophisticated financial system improves the GDP growth obtained out of a given flow of investment.

Apart from this perspective of India as a consumer of financial services, India also has an unusual opportunity in producing financial services, on a global scale, for four reasons:
- The skills required – Trading and risk taking, English, Mathematics, Computer Science, Law – are all things that the Indian workforce is good at.
- People of Indian origin are at the top of all global financial firms, and can easily utilise India in their plans.
- There is no established international financial centre in Indian day time. For some hours a day of the Indian daytime, India is the only rival in global finance competition.
- 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 as its hinterland) and Hong Kong and Shanghai (which have China as their hinterland).
 
These ideas were explored by the Percy Mistry Committee report, Mumbai as an International Financial Centre, in 2007. This report argued in favour of fundamental reform of finance, and stated that India has an opportunity to compete with London and New York if this were done.

Loss of market share in the rupee and the Nifty

A greater urgency has developed on these questions in recent years owing to the hollowing out of key financial markets in India. The problems of Indian capital controls, financial regulation and taxation have led to a flight of trading in the rupee and Nifty out of the country. Roughly half of the global trading in the rupee and in the Nifty is now taking place outside India, at locations such as Singapore, Dubai, London, etc. These cities have developed active markets in India-related finance, owing to sound frameworks for capital controls, financial regulation and taxation.

Improving India’s financial globalisation

At present, global fund managers sit in Singapore or London, and invest in India. Indian companies go to London or New York to raise money. This inevitably favours the biggest and most famous companies who are well known in the eyes of foreign investors. There is strong evidence of such ‘home bias’ by global investors against investing in most Indian companies. While large firms are well known to fund managers in Singapore or New York, thousands of other Indian companies do not get noticed. To the extent that India-related fund management takes place from Finance SEZs which are physically located in India, this will reduce home bias: The teams which work in these fund management organisations will be more likely to know hundreds of Indian companies.
 
Objectives of Finance SEZs

Objectives of Finance SEZs as being three fold:
1. To create high value jobs by having production of financial services take place on Indian soil.
2. To create an avenue into financial globalisation, akin to Hong Kong, which would benefit the Indian economy and give policy makers an enhanced set of instruments for competing with China’s moves on finance and on the international role of the Chinese Yuan.
3. To implement the new work that is on the agenda for financial economic policy at the Ministry of Finance, so as to be a laboratory where controlled experiments with new ideas in policy take place, and feedback can then be used by the Ministry of Finance to alter course for the future.


Thursday, 07th Apr 2016, 11:04:25 AM

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