Inviting Comments On Policy Framework For Finance SEZs

By Vijay Kumar

NATIONAL Institute of Public Finance and Policy (NIPFP) has submitted a Concept Note to Ministry of Finance on February 6, 2015 detailing objectives and policy framework for setting up Finance SEZs in India. The concept note also highlights steps and short-term actions that may be adopted to start off a Finance SEZ.

The Finance Ministry invites Views/comments on the proposed policy framework. The Concept Note highlights -

Finance is one of the world's biggest industries. The bulk of global financial services production takes place in a few international financial centres: New York, London, Singapore, Hong Kong and Tokyo. Finance production in these cities creates high wage jobs and wealth. In addition, high quality financial services supports high GDP growth in the hinterland. As an example, the presence of Hong Kong as an international financial centre assists Chinese companies.

India is a large user of financial services, by virtue of a large and growing GDP and a high rate of investment and savings. At present, India is consuming financial services produced onshore as well as offshore. India requires sophisticated financial services to fuel growth in the future. The financial system determines the allocative efficiency of the use of capital; a sophisticated financial system improves the GDP growth obtained out of a given flow of investment.

At present, global fund managers sit in Singapore or London, and invest in India. Indian companies go to London or New York to raise money. This inevitably favours the biggest and most famous companies who are well known in the eyes of foreign investors.

There is strong evidence of such `home bias' by global investors against investing in most Indian companies. While large firms are well known to fund managers in Singapore or New York, thousands of other Indian companies do not get noticed. To the extent that India-related fund management takes place from Finance SEZs which are physically located in India, this will reduce home bias: The teams which work in these fund management organisations will be more likely to know hundreds of Indian companies.

Export processing zones were first done in 1965 in Kandla and 1973 at SEEPZ. At the time, India was not ready for removing trade restrictions; customs duties were very high and import of many things was banned. SEZs like SEEPZ had free trade with the world. This was a valuable learning ground where Indian firms learned how to do production in a globalized setting. Kandla and SEEPZ helped the policy community in India get used to the idea of trade openness. With a lag, these policies were applied on an all-India scale.

In similar fashion, in the long run, India will have full capital account convertibility and India will have the Indian Financial Code (IFC). This is the inevitable direction of economic reforms in India. Finance SEZs are a controlled environment in which these reforms can be implemented first, and thus increase the familiarity with these reforms in the eyes of financial firms, government agencies, global investors, etc.