Gift City, the country’s new international financial hub, which was constructed on a piece of wilderness in Gujarat, the home state of Prime Minister Modi, isn’t attracting investors.
Singapore used a combination of quick and slow thinking as it established an international financial facility in the 1960s. The city-state took advantage of a chance right away while also paving the way for future economic growth. In Gujarat, the home state of Prime Minister Narendra Modi, India is making the same effort more than 50 years later. However, if little consideration is put into what it is creating, for whom, and why, all it might receive is a big casino for the wealthy locals.
The British pound was devalued in 1967, and for Singapore, that was the breaking point. One benefit was that it increased awareness of Dutch trader Dick van Open, who had gained a “substantial windfall” from the rapid 14% change for both his company, Bank of America, and the newly independent city-state. Singapore, though, recognised more than just the immediate financial gain.
A bitter realization that the empire’s currency had finally reached its end had been brought home to the Sterling Area’s members, the majority of whom were former British colonies, by the fall of the pound. They now had no choice but to switch to the dollar to lend and borrow. East Asia could more easily finance the kind of fast expansion it envisioned for itself at the time by asking the wealthy overseas Chinese in Hong Kong, Taiwan, Manila, as well as Jakarta to deposit their money in dollars. Some of them had amassed enormous riches thanks to post-colonial cartels and monopolies in a variety of industries, including gambling, horse racing, flour production, and coconut milling, which provided them with guaranteed cash flows.
As per Oxford University history Catherine Schenk, the longer-term driving force behind establishing a dollar-denominated financial hub was channeling these foreign cash savings into domestic assets and expanding the Singapore economy. The first location of Bank of America that was granted authority to open a unique set of books exclusively for overseas business was in that location.
The project was started in 2007 with the lofty target of converting Mumbai, the nation’s domestic financial hub, into an international port “by no later than the close of calendar 2008.” However, there is little appetite left for the world economy after a 14-year hiatus that included both the 2008 economic crisis and a pandemic. Even trade openness, which appeared unstoppable in 2007, has been threatened by an erroneous desire for self-sufficiency. The project was ripped out of Mumbai and transported to a remote area in Gujarat. The initial goal was also forgotten somewhere along the route.
Every new business needs its earliest customers. If India had adopted Singapore’s strategy, it would have started by luring nonresident Indians to maintain some of their wealth with their bank’s branches in Gujarat International Finance Tec-City, also known as Gift City, by offering them straightforward products that were not readily available commercially on the global markets, like investment sovereign Indian bonds. Commercial issuers would have done the same. However, bankers—who require decent bars and schools—run the banks. Ten kilometers (6.2 miles) from Gandhinagar, the state’s capital and where alcohol is illegal, three high-rise structures provide neither.
Since a bank-led strategy seemed impractical, those in charge of Modi’s favorite project resorted to capital markets in the hopes that, with the right incentives, brokers would do trading in Gift City all without having to visit it. As a result, the depressing location has been working for years to establish itself as a market for contracts denominated in foreign currencies to share in the financial intermediaries that now takes place in places like London, Singapore, Hong Kong, or Dubai, but where the main risk lies: India.
It won’t be hedge funds. In Singapore, people can find anything they need for hedging their bets or speculating within a mile of each other. The top stock exchange in India even engaged in a hissy fit with its longtime partner, Singapore Telecommunications Ltd., to intimidate prospective investors. Since then, the controversy has subsided, and after assuring “member preparedness,” it has been decided to install a pipe connecting Gift City’s NSE and SGX. While this is happening, the city-state continues to enthusiastically trade derivatives related to Indian indices and stocks:
Another strategic blunder will now be made. The central bank had just last week permitted residents to open foreign currency account balances within Gift City to trade in assets offered by international companies. This does not further the capital-account convertibility objective. India already allows an annual allotment of $250,000 for abroad remittances for all adults and minors. Even worse, the capital placed in Gift will return to a rupee account if it isn’t invested in 15 days. A reputable international issuer is not likely to be persuaded to promote stocks or bonds in Gujarat with a loose change of Indian retail investors’ capital parked there temporarily.
Who is this for, then? Gift enables brokers to combine the funds of international clients into omnibus accounts. Only the brokers must be convinced of the investors’ legitimacy; investors are not required to register. Broker-dealers have recently drawn the ire of the US Securities & Exchange Commission for failing to conduct adequate research on omnibus-account clients to stop money laundering. The project’s regulator, which is still in its infancy, must keep a close eye out for “round-tripping,” or local money leaving the country to avoid paying taxes before returning as foreign investment.
Another strategy is to attract foreign investors with tax benefits to bring non-deliverable forward trading to Gift. These bets on the rupee are not subject to India’s currency controls because they are settled in dollars. Another instance of the horse being put before the cart. A 2019 Banking for International Development poll found that rupee contracts, among emerging-market NDFs, are the second-most common after the South Korean claim, accounting for 19% of the $250 billion-per-day market. When a central bank is under pressure to manage a regulated home currency due to a balance-of-payment issue, such as during the 2013 taper tantrum, the price controls these offshore futures generate can be problematic. India should deepen the local rupee trade in Mumbai rather than wishing for these possibly unstable movements to come closer to its borders. Additionally, like South Africa and Mexico, it must pay closer attention to interest-rate futures.
Singapore beat competitor Hong Kong to the punch by becoming an international financial hub, despite the bankers’ initial opposition. However, the experiment was successful despite the lack of tall structures. Pragmatic regulation, a solid tax system, the rule of law, and quick dispute settlement influenced a lot. (Also helpful were good schools and bars.)
The Indian economy has been recovering from the pandemic and is flooded with central bank-sponsored money. It lacks the resources and prerequisites necessary to set up a genuinely global financial hub. A worldwide bazaar should never have been constructed in Gujarat. A gift has any economic rationale and might only be appealing to local rich people looking to stock up on some tax-free money. -Bloomberg
