Does India Play Money Changer to the World?
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.
“We could not believe it. It was obvious that they were stalling us,” says a person familiar with the process. He said they were expecting Indian banks to have customer data that was similar to the US or the UK. Parliament amended the Unlawful Activities Prevention Act and the Prevention of Money Laundering Act after the terror attack on Mumbai. One of the objectives of the amendments was to bring it line with FATF requirements.
India also changed laws to sign information exchange treaties with safe haven jurisdictions. It has already signed pacts with Bermuda and Bahamas. It is negotiating with at least a dozen others to sign similar pacts, according to an official with the Central Board of Direct Taxes.
Despite being aware that India had one of the more robust financial systems in the world and was working on bolstering it further, other members were stalling to allow India a membership of the FATF. At a meeting in Australia in April this year, Indian officials were given to understand that the country would score eight out of 14 key and core criteria that are evaluated for membership. But India scored only five, the same as China and South Korea. “It was clear that they did not want to give us more than China,” the person said.
Two months later at the plenary in Amsterdam, India raised objections against the ranking and prepared to argue its case on technical points to raise its ranking to eight on 14. It was offered a deal. Its ranking would remain the same but it would be admitted on the basis of its action plan to improve itself. India accepted and scraped into the world body as the 34th country member before membership closed.
Though sometimes reluctantly, the willingness and desire on the part of the current world powers to give India a greater role in global governance and recognise it as a major global player finds a strong resonance among the elite segments of the domestic establishment within India.
Ambition gets a boost
Kumar and Joseph argue that the desire of the Indian elite to play a global role has received a substantial boost from the strong economic performance starting with the reforms of 1991 and more so in this decade. India’s growth along with the rise of the middle classes and their demand for technology, natural resources and investment has made the country an attractive market and destination for global corporations seeking fresh expansion opportunities.
The ‘good’ India story has taken roots and changed perceptions both in corporate boardrooms and in OECD policymaking circles. This has given additional clout to the Indian elite in its quest for a larger global role.
They have been thrust in the same league as China, Brazil, South Africa and Mexico, all of whom have much stronger economies as reflected in their significantly higher per capita incomes. The Indian negotiators, comprising politicians, diplomats and bureaucrats, have found themselves to be members of the ‘international high table’ in several forums, an opportunity which responds to their own aspirations for a larger global role.
India’s emergence as one of the leading economies and the Indian elites’ desire for a larger global role presents both a challenge and an opportunity. It is a challenge because the world community now has to adapt to dealing with an even more assertive and demanding India as a negotiator in different forums, often leading the developing countries or their (G-77 or G-30) groupings. India’s rise also presents an opportunity because it has given the global community a counterpoint to China’s burgeoning economic growth and global influence. India can now be held up as an alternative model of development that combines democracy, free market and rapid growth.
The global community would thus want India to emerge as a viable and alternative model and use it also to offset some of the more difficult demands that a resurgent China can be expected to make as it continues to grab greater shares in global markets and trade. Moreover, a possible coalition between India and China, the two rising economic giants, for demanding a greater share in global governance in line with their economic clout, could make the change far too drastic and compressed in time.
The elevation of the G-20 finance ministers forum (set up in the late 1990s after the onset of the East Asian financial crisis) to the summit level after the 2007-09 meltdown, has been a godsend for India’s global aspirations. Four G-20 summit meetings have already taken place, one in Washington in November 2008, the second in London in April 2009, the third in September 2009 in Pittsburgh and the last in June this year in Toronto.
G-20 has now become the apex level forum to deal with the wide range of issues facing the global economy.
In this framework, there is a convergence of interests between the Indian establishment and the Western developed economies as represented by the OECD. According to this scenario, India, together with China, will emerge as a major global player and will be willing to shoulder greater responsibilities to ensure an orderly global transition. Given India’s longer and more rooted democratic institutions and traditions, there could be more expectations from India on this account.
The situation would change dramatically if India manages to create conditions for sustained rapid growth. The Indian experiment of trying to implement an inclusive agenda in a market economy framework will be keenly watched. Alongside, it should be able to increase its share in global trade by aggressively stitching up free trade agreements with a host of countries such as Japan and South Korea and economic blocs such as Asean and European Union.
(This story appears in the 27 August, 2010 issue of Forbes India. To visit our Archives, click here.)
