India’s Modi failed to make a Singapore in Gujarat

When Singapore set up an international financial hub in the late 1960s, the city-state was thinking both fast and slow — seizing
an immediate opportunity,
and opening a path to long-term economic development. Half a century later, India is attempting something similar in Prime Minister Narendra Modi’s home state of Gujarat.
For Singapore, the British pound’s 1967 devaluation was the moment of reckoning. For one thing, it raised the profile of Dick van Oenen, a Dutch trader who had made a “significant windfall” for both his employer — Bank of America — and for the newly independent city-state from that abrupt 14% change. But
beyond the immediate cash, Singapore saw a broader canvas.
The pound’s tumble had made countries in the Sterling Area, mostly former British colonies, painfully aware that the sun had finally set on the empire’s currency: They needed to switch to the dollar to lend and borrow. The kind of rapid growth East Asia then imagined for itself could be more easily financed by inviting the rich overseas Chinese in Hong Kong, Taiwan, Manila and Jakarta to deposit their funds in dollars. Many of them had become extremely wealthy on assured cash flows from post-colonial monopolies and cartels in everything from gaming and racetrack-betting to flour-making and coconut-milling.
Channeling these regional savings into local investments and diversifying the Singapore economy was the longer-term impetus for starting a dollar-denominated banking hub, according to Oxford University historian Catherine Schenk. Bank of America’s local branch was the first to get the permission to open a separate set of books purely for international business.
India embarked on the project in 2007 with the ambitious goal of turning Mumbai, the country’s domestic financial capital, into an international hub after making the rupee fully convertible “by no later than the end of calendar 2008.” However, after a 14-year interlude that encompassed both the 2008 subprime crisis and a pandemic, there’s little enthusiasm left for financial globalisation. Even trade liberalisation, which looked irreversible in 2007, is being undermined by a misguided yearning for
self-sufficiency. The venture was yanked away from Mumbai and taken to a patch of wilderness in Gujarat. Somewhere along the way, the original purpose was also lost.
All new stores need their early patrons. Had India pursued Singapore’s strategy, it would have begun by targeting nonresident Indians to keep some of their wealth with their banks’ branches in the Gujarat International Finance Tec-City — more popularly known as Gift City — luring them with simple products not available commercially in global markets, such as dollar-denominated sovereign Indian bonds. Corporate issuers would have followed. But banks are run by bankers, who need good schools. Three high-rise buildings situated 10 kilometres from Gandhinagar offer neither.
Since a bank-led approach wasn’t feasible, minders of Modi’s favourite project turned towards capital markets, in the hope that with sufficient inducement brokers would book trades in Gift City without having to set foot there.
As a result, the joyless place has spent years trying to become a marketplace for foreign currency-denominated contracts, hoping to capture some of the financial intermediation that now takes place in London, Singapore, Hong Kong, but where the ultimate risk resides in India.
The Gujarat market offers a slew of tax breaks, but has very little customer liquidity. India’s two domestic exchanges — the National Stock Exchange of India and BSE — are providing costly incentives to intermediaries to trade with one another there. At least 85%-90% of trades at Gift exchanges are proprietary trades, the news website Morning Context recently reported.
Hedge funds aren’t coming. Everything they want for risk mitigation or speculation is available within a one-mile radius in Singapore. To arm-twist investors to come, India’s No. 1 stock exchange even picked a hissy fight with its long-term partner, the Singapore Exchange Ltd. The conflict has since died down, and there’s an agreement on setting up a pipe connecting NSE in Gift City with SGX after ensuring “member readiness.” Meanwhile, the city-state is still trading derivatives linked to Indian indexes and stocks with gusto: Now comes another strategic wrong turn. Just last week, the central bank allowed resident individuals to open foreign-currency accounts in Gift City to invest in securities issued by overseas firms. This isn’t a step toward the original goal of capital-account convertibility. India already permits all adults and minors an annual $250,000 quota for overseas remittances. Worse, if the money placed in Gift isn’t invested in 15 days, it returns home to a rupee account. Loose change of retail Indian cash parked temporarily in Gujarat is hardly going to entice a pedigreed global issuer to hawk equities or bonds there.
So who’s this for? Gift allows brokers to pool foreign customers’ money under omnibus accounts. Investors don’t need to register, only the brokers need to be satisfied that they’re
legitimate. Even the US Securities and Exchange Commission recently ticked
off broker-dealers for not doing enough due diligence on omnibus-account customers to prevent money laundering.
The project’s regulator, which isn’t even one year old yet, will have to be on a serious watch against “round-tripping,” or local money escaping to evade taxes and then reentering as overseas investment.

—Bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News