Does India’s financial capital, Mumbai or any other Indian city with a vibrant business culture, therefore, have the wherewithal to be the next international financial center? While it would not be possible to form any sweeping prescriptive generalizations about how Indian cities can become international financial centers, one can certainly attempt to list a few common factors that go into making a city a magnet for attracting financial institutions:
1. Ease of starting and closing a business: Singapore perhaps tops the list of all international financial centers when it comes to this. Hong Kong, Dubai, Zurich and Luxembourg are not far behind. Depending on the country, the ease of doing business is either a country-specific or a city-specific phenomenon. India, which has more-or-less uniform laws across states when it comes to the ease of starting, transacting or closing down a business (especially one that requires regulatory approvals from government agencies monitoring financial institutions), as a whole ranks fairly low on the Ease of Doing Business Index prepared annually by the World Bank (India’s 2010 ranking was 133, lower even than Malawi). Whereas individual Indian cities cannot by themselves do much to improve this situation, state governments can readily step in by expediting several regulatory and governmental processes that come under their domain and by lobbying with the central government to make financial regulation simpler and less time consuming.
2. Taxation and general monetary policy: Comparable tax sops and other incentives are the key to attracting the best merchant and commercial banks, hedge funds, brokerages etc to a destination. If the place concerned has a sovereign wealth fund of its own, it goes a long way in boosting investor confidence, as in the case of Dubai and Singapore. While these cities and several others across the world have a near total control over how they tax businesses and individuals operating out of their territories, the Indian scenario is quite different. Whereas in the case of brick and mortar industries, a significant portion of the taxes form a part of the ‘State List’ controlled by individual states, when it comes to financial institutions, the ‘Union List’, under the central government’s jurisdiction, actually regulates almost all the taxes they pay. Therefore, Indian cities individually do not have any direct control over taxation, hence taxation as it is, ceases to be much of a differentiator when it comes to individual Indian cities.
3. Politics: Political stability becomes a pertinent factor in the case of the financial sector, as hot money can flow in and out of a place in no time. Whereas cities like Mumbai and Hyderabad have historically been relatively peaceful (barring the odd communal incident), in recent times regional and linguistic issues have threatened to disturb their delicate social fabric and could be detrimental to the long term business interests and inflows that these cities attract. Other smaller and ‘newer’ cities like Gurgaon and Chandigarh that are ‘more’ urbane, with greater concentrations of middle-class and upper-middle-class population, mostly immigrant from near and far, do not have such political issues, a fact that might help greater investment into such centers.
4. Society: International business has an idiom of its own and any destination hoping to attract the best financial institution has to adhere to that idiom. As almost all finance jobs are white collar and high-paying, the financial sector affords a great deal of mobility to those that work in it. All financial centers, without exception have a heady mix of people coming in from practically every corner in the world to work there for good or for short-term environments, thus giving these places a cosmopolitan environment. Such places need to have a more ‘open’ and less ‘rigid’ social milieu. One major reason why Dubai, and not Riyadh, is the main financial and business hub of the Middle East, is that Riyadh follows a strict Islamic code, while Dubai does not. Most cities in India that are traditionally business-friendly have by now developed a cosmopolitan culture, at least in pockets within the city, if not all pervasive across it.
5. Education: The city that successfully promotes a ‘knowledge economy’ and has the wherewithal to support such an economy will have a distinct advantage over others. Every international financial center mentioned in this piece boasts of some of the best known schools of higher learning, especially B-Schools of repute. While the same largely holds good for cities like Mumbai, Ahmedabad, Bangalore and Hyderabad having technical and management institutes of the level of the IITs, NITs, IIMs and ISB, located either in those cities or in their vicinity, much cannot be said about the rest of India.
6. Geography and infrastructure: A networked world has enabled businesses that are not brick and mortar, to operate from just about anywhere as long as robust information technology and communication systems are in place. Having said that, founding such a utopian new age city out of nowhere and then hoping it would become a major financial and business center, is well, wishful thinking. Sure, Singapore, Hong Kong and Dubai all sprang up as ‘new’ cities for all practical purposes, but they did not spring out of nowhere; they were extensions of existing cities, had a definite history to boast of and a historically advantageous geographical position. In the Indian context, Mumbai certainly has a geographical advantage, which has made it the predominant financial center in South Asia; indeed, several top financial institutions do operate out of Mumbai and satellite townships of Navi Mumbai and Powai. Yet, cities like Bangalore and Hyderabad and townships like Mohali, which do not have any particular geographical advantages have become significant information technology hubs, primarily because local governments have been investment-friendly and have managed to put in top quality infrastructure and attract the best talent pool from India and outside. Since these cities already have working ‘new age’ economies, establishing financial institutions at a large scale should be an extension of businesses already operating from there and geography per se would neither be a constraint nor be a differentiator.
7. Global clout of host country: London, Chicago and New York are prime examples of traditional international financial centers that gained dominance because their countries were politically dominant. Even in the post-Second World War scenario, Shanghai, Hong Kong and Tokyo were helped a great deal by the fact that over time, both China and Japan became relatively dominant global players. However, political domination is not in itself a predominant reason as in the case of countries like Switzerland, Singapore, the UAE and Luxembourg, which are themselves not politically dominant; yet are either aligned to powerful international blocks or are politically neutral by design or default. India is already a dominant political, military and economic player regionally and the effects of such dominance are evident. Yet, even if India’s political impact and military prowess in the decades to follow, do not achieve greater momentum, it will not adversely impact her cities’ prospects in becoming international financial centers.
8. Diversification: Diversification of businesses so as to avoid over-dependence on one or few sectors. The best example of this is Dubai, which, despite not being as oil rich as the other emirates that make up the United Arab Emirates, has become an international financial center. It has successfully managed to diversify its business interests into sectors as diverse as hospitality & tourism, information technology, real estate, education and banking. The same holds good for cities like Singapore and Hong Kong. Out of all the existing business centers in India, Mumbai is perhaps the most diversified of all in terms of the range of sectors that operate their key operations out of that city; Hyderabad and Bangalore follow closely. While this fact, in itself does not constrict their prospects of becoming international financial centers, diversification undoubtedly gives a city a stronger backbone and greater flexibility to ride out periods of financial crises, internal and external.
9. Stock market: Every international financial center invariably has a robust stock market. In India, only Mumbai has stock exchanges—the Bombay Stock Exchange and the National Stock Exchange—that are nationally significant. Stock exchanges operating out of other Indian cities are relatively less significant in terms of how much they are impacted by or have a bearing on the national economy, a fact that can be an impediment in cities like Hyderabad, Bangalore, Ahmedabad and Chandigarh in becoming international financial centers.
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written by Global financial markets, November 12, 2010
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