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Banking on our markets

New York, London and Dubai have suddenly become negative international icons. But making Mumbai or other Indian cities into financial hubs should remain on New Delhi’s list of things to do.

india Updated: May 16, 2010 22:10 IST

No one is talking much about making Mumbai an international financial centre anymore. The financial sector is in the doghouse for its role in the present global economic roller coaster. New York, London and Dubai have suddenly become negative international icons. But making Mumbai or other Indian cities into financial hubs should remain on New Delhi’s list of things to do. An advanced financial sector functions as the brain of an economy, raising and allocating capital in an efficient manner. Finance also plays to India’s soft strengths — independent judiciary, depoliticised regulation and strong civil society. Which is one reason India’s financial sector is seen as functionally superior to China’s though a lot more money sloshes around in the latter.

The decision of the UK-registered Standard Chartered Bank to raise capital for its own use on the Indian stock market raises the possibility of another goal. This is making Mumbai an international capital market centre — less Dubai and more New York. This would add tremendously to India’s global profile, encourage the expansion of the less dodgy areas of finance, and provide spinoffs for the main engine of the new Indian economy — the private corporate sector. Standard Chartered’s $500-$730 million Indian Depository Receipt (IDR), the first time a foreign multinational is raising capital from India, will seek the funds of both Indian and foreign institutional investors. It’s largely a decision reflecting the bank’s unusual East-West profile: a British bank whose two biggest profit centres are Hong Kong and India. The decision is also a recognition of the advances India has made in the area of financial regulation.

As the 2009 Milken Institute’s ratings of national financial markets indicate, India earns the highest ratings among emerging economies in areas like international funding, equity market maturity, quality of financial institutions, and the use of venture capital and private placements. It’s still far behind developed country regulatory environments — even the rules regarding IDRs are extremely user-unfriendly. The real weakness is that while India is no longer a country of capital famine, almost all the country’s large savings pool is consumed by a profligate government. Until New Delhi learns to control its appetite for red ink, India can dream of being a facilitator for foreign corporations but not a genuine player of the game.