Growth has given India the potential to become a global financial power. But the country has to earn its place one step at a time
In the autumn of 2009, Sebi Chairman C.B. Bhave and finance ministry official K.P. Krishnan got an unexpected chance to address a select gathering of financial wizards at the City of London. Krishnan, joint secretary for capital markets at the ministry, remembers the day very well. “The who’s who of the City [was] present there to listen to us, including the Lord Mayor presiding in his official regalia,” he says. As the question and answer session began, Krishnan noticed a curious turn. Most of the questions revolved around the Percy Mistry report on making Mumbai an international financial centre. The post-lecture conversation over a strictly vegetarian dinner in honour of the two Indian officials too was dominated by the report.
The Indian officials were surprised by the gathering’s knowledge of the report. “It was almost like they had the report by heart,” remembers Krishnan. He felt that they were subtly discouraging India from executing the Percy Mistry plan.
The incident reveals a tacit recognition of India’s potential as a global financial power. The economic growth, the resilient domestic financial system that withstood two crises — the Asian monetary crisis of 1997 and the global meltdown of 2008 — and the country’s record in bank supervision and regulation have all become talking points among the top echelons of the global financial order. But then, that is the ‘good’ India story.
There is also the ‘bad’ India story to contend with.
The world’s second most populous country doesn’t even figure among the top 100 nations in per capita income. Individual income in the country is less than a third of world average. India has a mere 1 percent share in global trade, a figure that has not gone up despite the opening up of the economy nearly 20 years ago. The rupee has a negligible presence in the world currency trade and is not even fully convertible on the capital account. Its banks and financial institutions are yet to globalise in a significant way. To believe that this country is becoming a global financial power, some would argue, is at best wishful thinking.
Like most ironies about India, there is truth to both sides of the story and it is up to the policymakers to take it one way or the other. A greater integration with the world financial system will bring both capital and quantum of transactions to Mumbai thereby making it easier and cheaper for the government and businesses to raise finance.
Battling for Recognition
In a paper on India and global governance, Rajiv Kumar and Mathew Joseph of ICRIER compare the economic rise of about half a dozen emerging economies in the past two decades led by China to the rise of the US, Germany and Japan in the second half of the 20th Century. The upheavals in the global economy are perhaps of the same order and magnitude as those that took place in those momentous decades when, first the US and then Germany and Japan emerged as major global economic players and challenged the economic and strategic hegemony of existing global powers like France, UK and Spain.
While India is clearly far behind China currently in economic terms, the possibility of its overtaking China because of the underlying structural features of the two economies can’t be ruled out. India’s success in training its large human resource base in complex technical skills and thereby emerge as the sole surplus provider of technically trained labour may prove to be a major strength in coming years.
The country’s successful breakthrough in the software industry combined with the greater strength and global reach of its private enterprise has prompted some experts such as Yasheng Huang of MIT and Tarun Khanna of Harvard Business School to think of the 21st century as belonging to India rather than China in terms of their relative economic prowess.
Thus, the world and especially the OECD countries see India as an emerging global economic power that should be given the corresponding space and responsibilities in any emerging global governance structure, Kumar and Joseph say.
Yet, the country often ends up fighting for that position. A recent example was the struggle India went through to gain membership of the Financial Action Task Force (FATF), an inter-governmental body which aims to tackle the issue of money laundering and terrorist financing. The FATF was established in 1989 by the G-7 to tackle money laundering but was reinvigorated with the efforts of the United States after the September 11, 2001 attacks to include terrorist financing. India has suffered the consequences of the loose financial system that lets terrorists exploit legitimate channels to launder their money and has always wanted to influence international policy on the issue.
India had actually been invited as early as in 1994 to become a part of it but didn’t take it seriously. However, a few years ago, India started the lengthy process of becoming a member. One of the entry conditions to the FATF is a peer group assessment. Last year, after the peer group assessed India’s financial system, its leader commented that the Indian banking system was poorly supervised.
(This story appears in the 27 August, 2010 issue of Forbes India. To visit our Archives, click here.)