The World’s five largest economies are the United States of America, China, Japan, Germany and India. Except for India, the first four also house global champions in all key sectors from banking, insurance, and automobiles to financial markets. Indeed, the top largest economies need to lead in some sectors or technologies to sustain and cement their positions in the long run.
It’s not too late for India. India’s time has just begun as it became the fifth-largest economy only in 2022 by overtaking the United Kingdom.
Fortunately, Prime Minister Modi is already on the job. In December 2021, the PM announced his vision to make India a developed nation by 2047, the 100th year of India’s independence. According to the vision being consolidated by the government think-tank Niti Aayog and to be unveiled by Mr. Modi in a couple of months, India will become the third largest economy in the next five years, by overtaking Japan and Germany, the two prominently industrialised nations. It is estimated that India’s economy will be USD 6.7 trillion by 2030 from USD 3.5 trillion in 2022, USD 16 trillion by 2040 and USD 29 trillion by 2047.
Financial hubs play an important role in channelising global patient funds for infrastructure, manufacturing and climate financing projects. In the last two decades, Hong Kong could get mainland Chinese companies to get listed on the Hong Kong exchange, effectively channelling a lot of foreign capital to boost China’s growth.
A similar phenomenon is possible for India to fire its economy, which is roughly a couple decades behind China’s. So, India will have to undertake more medium-term interventions and structural reforms to elevate the Gujarat International Finance Tec-City (GIFT City), India’s first International Financial Services Centre (IFSC) to the top ten in the next five years from 62nd rank now. GIFT IFSC, India’s answer to global hubs like London and Singapore, is treated as a foreign jurisdiction for lenient taxation purposes by the Government of India.
Given that Mr. Modi, during his tenure as the Chief Minister of Gujarat conceptualised GIFT City in 2008, one would take heart that he would leave no stone unturned for this.
Financial centres in New York, London, Singapore, Hong Kong and Los Angeles are the top five financial hubs in the world, while Tokyo at 20th and Dubai at 21st on the Global Financial Centres Index.
The GIFT IFSC is being groomed by the government to make it an international financial hub on the lines of London that could act as a catalyst in attracting foreign investors to Indian corporations which are gaining global prominence and need a large pool of capital to increase their global footprint, the hallmark of a developed nation.
So, GIFT City should be leveraged to push the envelope on financial sector liberalization.
An important milestone in this regard would be the direct listing of Indian companies on stock exchanges in GIFT City. This would give overseas listing treatment to Indian firms and enable them to take advantage of lenient tax rules for the offshore facility.
The International Financial Services Centres Authority (IFSCA), the regulator for IFSCs, should operationalise the framework for direct listing in GIFT City at the earliest.
An Indian firm listing on bourses in IFSC will be comparable to listing on an international exchange like the New York Stock Exchange or the London Stock Exchange. Currently, Indian companies are not allowed to list directly on overseas exchanges as per regulations. However, listed Indian companies can use American Depository Receipts (ADR) or Global Depository Receipts (GDR) to make their shares accessible to overseas investors or list debt instruments on overseas exchanges.
To start with, state-run firms such as ONGC Videsh Ltd, the offshore arm of India’s largest oil explorer, may be listed in the GIFT City exchange to mobilise funds in foreign exchange for its global operations. This would give confidence to domestic private sector firms, having a global footprint, to list in GIFT City, instead of incurring additional costs of listing in other global hubs.
GIFT will take some time to achieve critical mass. Presently, GIFT IFSC has more than 540 entities registered across various business segments including banking, capital markets, insurance, FinTech, bullion exchange, etc. and is rapidly growing with healthy and increasing participation of international and domestic financial institutions.
India did utilise its 2023 G20 Presidency to market the huge potential of developing GIFT City to its counterparts and multilateral development banks.
The cumulative climate investment needed for cities in emerging markets to mitigate and adapt to climate change is estimated at USD 29.4 trillion between 2018 and 2030. GIFT IFSC, with trusted business regulations, and a competitive tax structure with a focus on ease of doing business, could harness the potential.
In order to enhance the global competitiveness of the IFSC for non-resident investors, the government recently exempted tax on capital gains arising from the transfer of units of investment trusts and exchange-traded funds (ETFs) on exchanges in the IFSC.
Currently, specified securities such as foreign currency-denominated bonds, units of a mutual fund, units of a business trust, foreign currency-denominated equity shares of a company and units of AIF enjoy capital gains tax exemption in the IFSC.
The government has to quickly develop a comprehensive legal framework to make GIFT a thriving global hub for accounting and financial back-office functions.
Among other areas, the IFSC Authority and the Insurance Regulatory and Development Authority of India (IRDAI) have to proactively collaborate with leading global insurance firms to position GIFT City as a leading global hub for insurance and reinsurance. This could draw significant global business opportunities and investments given India’s rising economic power.
The Indian International Bullion Exchange IFSC (IIBX), which was launched in 2022, should be leveraged for efficient price discovery and disintermediation. A tariff rate quota (TRQ) gold imports system under the Comprehensive Economic Partnership Agreement with the United Arab Emirates, could pave the way for Indian banks to seamlessly utilize the IIBX platform.
Expansion into niche areas and infrastructure development to expand the range of services are available at the GIFT City.
There is also significant potential for growth in emerging niche sectors such as logistics for precious metals, global insurance, and aircraft-and-ship leasing.