Being Mumbai

The key to that change is in the hands of the committee set up on March 20 by the RBI to produce a road map for full convertibility of the rupee on the capital account. The group, led by former RBI deputy governor S.S. Tarapore, is set to complete its report by July 31 this year. Convertibility is a political hot potato. There is no single definition, but economists generally agree that full convertibility on the capital account implies the freedom to buy and sell assets, like equity, debt or land across international borders at prices determined by the prevailing market rate of exchange. Tarapore himself defines it as the freedom to exchange local financial assets for foreign financial assets and vice versa at market rates without encumbrance.

Because of the opportunity that it gives, say, foreign multinationals to pick up Indian assets, the Left parties believe full convertibility on the capital account is tantamount to selling India on the cheap; the other side reckons it is the only way to unleash India’s economic might. We haven’t seen the last bitter debate on the subject.

But capital account convertibility should also help Mumbai cut loose as a global financial centre. The associated investment can be a blessing for the city’s creaking infrastructure, which threatens to collapse from the strain of supporting 18 million people. There are several reasons why it makes sense for India to push Mumbai’s development as an international financial hub on the back of capital account convertibility.

A forecast by consulting firm McKinsey says that India will be one of the world’s five largest economies within 15 years. On a purchasing power parity scale, theIMF already ranks India as the world’s fourth-largest economy. Bizarrely, it is the only country in this lofty company that doesn’t have an internationally significant financial centre. This is odd because, assuming convertibility of the rupee, a financial centre offers one of the best ways to leverage the underlying strengths of the economy.

Without convertibility, India might not be making full use of its economic strength, which is why Prime Minister Manmohan Singh asked the finance ministry and the RBI to examine the issue. The Left parties, in contrast, believes the Indian economy is still too fragile to be exposed to the consequent volatility in funds flow and exchange rates. Shubhada Rao, chief economist at Yes Bank, sees it differently: "The PM’s recent statement supporting the move towards fuller capital account convertibility is a reiteration that the Indian economy is fairly resilient today to withstand global volatilities."

The Left is also probably getting its economics a bit muddled when it rails against capital inflows arising from convertibility. As a derivatives analyst from Credit Suisse First Boston explains, "The big opportunity from rupee convertibility will be outward, not inward, flows. India could invest in offshore real estate or world stock markets, Indian companies can buy foreign companies more easily; international wealth management products can be sold in India." Also, Indian firms can lower their cost of capital. "For instance, they could have full access to a much greater range of fund-raising and risk management products—derivatives, leveraged finance, hybrid issuance—the overall business opportunity from having an international financial centre may be worth ten times the software industry," he contends.

Those aren’t idle projections. The two main Asian hubs west of Tokyo are Hong Kong and Singapore. But their clout is reducing. Mainland China prefers to develop Shanghai, rather than Hong Kong, while Singapore’s importance, especially in the local currency forex market, has been declining steadily. And still, the two cities’ status as global centres generates some US $35-40 billion (Rs 1.56-1.78 lakh crore) in financial business each year. That’s an opportunity waiting to be tapped by a competing centre.

"Mumbai has the potential for replacing Singapore as a regional hub and replicating Shanghai’s success with its talent pool and locational advantage. Leading global players are already using India for backoffice services and offshore equity research. With open capital account, I’m sure it will not take Mumbai too long to emerge as a hub for trading and asset management services," says Yes Bank’s Rao. The eventual implications, in terms of monetary fund flows and revenues to the government, are humongous.

It’s clear that something colossal will be needed to get Mumbai to compete with Singapore or Hong Kong. Or for that matter, Dubai, which is actively pitching itself as an alternative. Mumbai’s (and Maharashtra’s) power and transport woes are well documented. Poor infrastructure is one reason why Maharashtra isn’t even India’s most industrialised state—the latest Annual Survey Industries (2003-04) puts Maharashtra (19.1 per cent) behind Gujarat (19.8 per cent), in terms of contribution to India’s organised manufacturing sector. One-time titans of Maharashtra business, like Bajaj Auto, Mahindra & Mahindra and Tata Motors, are setting up new plants elsewhere. Big-ticket fdi proposals like the planned Boeing venture remain on paper. The World Bank-funded Mumbai Urban Transport Project and state government’s Mumbai Urban Infrastructure Project are under way but their impact is yet to be felt. In fact, last year’s monsoon only served to underscore how far it needs to go to bridge the gap between its ambitions and reality.

Against all this, Mumbai’s pluses, like a large talent pool, established financial practices, steadily improving regulation, relatively transparent judiciary and the widespread use of the English language, seem almost inadequate. Full rupee convertibility itself is no magic pill that will fix the city’s problems; it isn’t even an event, it is a process. But because of the enormous revenue generating potential of having a global financial centre, it is the only thing that can offer a large enough financial incentive for Mumbai and its planners to remake the city.

The gap between the infrastructure that is available and what is required is closing, just a little. "When we think in terms of where we are and and where we want to be, I think the gap has been bridging pretty steadily," says Monish Tahilramani, treasurer, HSBC. No one’s losing sight of the tests ahead, though. Says T.V. Raghunath, executive director, Kotak Mahindra Investment Bank, "One challenge is to create value for a company to list here, if it were allowed to. A company would list in a market where there is a strong regulatory framework as well as a natural recourse; for instance, a company would list in the US to tap that investor base. I think we are some distance away from that still."

One of the outcomes of the American Civil War of 1861-65 was that a huge share of the world cotton trade moved from America’s southern states to British-ruled India virtually overnight. This shift kick-started Bombay’s emergence as India’s financial capital, and made multi-millionaires out of financiers and traders like Premchand Roychand. The World War II played a pivotal role in the development of London and New York as financial hubs. Their greatness didn’t simply devolve from their infrastructure alone. What mattered more was that the participants in those financial bazaars had total faith in systems. It can happen to Mumbai again. As the CSFB analyst in Hong Kong puts it, "You will listen to the huge sucking sound of capital leaving Hong Kong and Singapore if Shanghai and Mumbai get it right."