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Prime Minister Narendra Modi’s plan to create a Singapore in Gujarat falls flat

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ByAndy Mukherjee

When Singapore established an international financial center in the late 1960s, the city-state believed both quickly and slowly to seize an immediate opportunity and pave the way for long-term economic development. Half a century later, India is attempting something similar in Prime Minister Narendra Modis’ home state of Gujarat. But without giving too much thought to what exactly his building is, for whom and for what purpose, all he can get is a casino for the local wealthy.

For Singapore, the devaluation of the British pound in 1967 was the point of calculation. On the one hand, this raised the profile of Dickvan Oenen, a Dutch trader who hada significant windfallfor both his employer Bank of America and the newly independent city-state of this sharp 14% change. But beyond the immediate cash, Singapore has seen webs overseas.

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The fall of books had caused the countries of theSterling region, mostly former British colonies, painfully aware that the sun had finally set on the Empire’s currency: they had to switch to dollars to lend and borrow. The kind of rapid growth then imagined in East Asia could be more easily funded by inviting the wealthy overseas Chinese in Hong Kong, Taiwan, Manila, and Jakartato to deposit their funds in dollars, many of which had grown extremely wealthy. thanks to cash flow the cartels in everything from gambling and track betting to flour making and coconut grinding.

According to Oxford University historian Catherine Schenk, the transformation of these regional economies into local investments and the diversification of Singapore’s economy have provided a longer-term incentive to create a banking center denominated in US dollars. The local branch of the Bank of Americas was the first to obtain permission to open a separate book only for international business.

India embarked on the project in 2007 with the ambitious goal of transforming Bombay, the country’s national financial capital, into an international hub after making the rupee fully convertible.by the end of the 2008 calendar at the latest.However, after a 14-year gap that encompassed both the 2008 subprime mortgage crisis and a pandemic, little enthusiasm for financial globalization remains. Even trade liberalization, which seemed irreversible in 2007, is undermined by a misguided desire for self-sufficiency. The adventure was ripped from Mumbai and taken to a wilderness corner of Gujarat. Somewhere along the way, the original goal was also lost.

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All new stores need their first customers. If India had pursued Singapore’s strategy, it would have started by targeting non-resident Indians to retain some of their wealth with their bank branches in Gujarat International Finance Tec-City, better known as Gift City, the attractive with simple products not commercially available on world markets, such as the dollar denominated sovereign. Indian bonds. Corporate issuers would have followed suit. But the banks are run by bankers, who need good schools and better pubs. Three high-rise buildings located 10 kilometers (6.2 miles) from Gandhinagar, the capital of a state where alcohol is prohibited, offer neither.

Since a bank-led approach was not feasible, those responsible for Modis’ preferred project turned to the capital markets, in the hope that with sufficient incentive brokers would make bookstores in GiftCity without having to set foot there. As a result, this joyless place has spent years trying to become a market for contracts denominated in foreign currencies, hoping to capture some of the financial intermediation currently taking place in London, Singapore, Hong Kong or Dubai. , but where the ultimate risk lies in India.

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The Gujarat market offers a host of tax breaks, but has very little liquidity for customers. Indias, two national exchanges, the National Stock Exchange of India Ltd. and BSE Ltd.reported.

The hedge funds are not coming. Anything they want for risk mitigation or speculation is available within a mile radius of Singapore. To arm future investors, India’s No.1 stock exchange even chose awhistling fightwith its long-standing partner, Singapore Exchange Ltd. The conflict has since died down, and there is an agreement to put in place a pipe from NSE to Gift City with SGX after ensuring member readiness. Meanwhile, the city-state still enthusiastically trades derivatives linked to Indian indices and stocks:

Now comes another bad strategic turn. Last week, the central bank allowed resident individuals to open foreign currency accounts in GiftCity to invest in securities issued by foreign companies. This is not a step towards the original goal of capital account convertibility. India already allows all adults and minors an annual quota of $ 250,000 for overseas remittances. Worse yet, if the money placed in Gift is not invested in 15 days, it goes home to a rupee account. The loose currency of Indian retail cash provisionally held in Gujarat is hardly going to attract a benchmark world for stocks or bonds.

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So who is it for? The giveaway allows brokers to pool money from overseas clients under omnibus accounts. Investors do not need to register, only brokers need to be convinced that they are legitimate. Even the USSecurities and Exchange Commission recentlycheckedbrokers for not doing enough due diligence on clients with omnibus accounts to prevent money laundering. The project regulator, who is not yet a year old, will have to be seriously vigilant against the back-and-forth or escape of local money through taxes, then reintegrate investments abroad.

Another plan is to bring the trade in undeliverable rupee futures bets that are constrained by Indian capital controls because they are settled in dollars at Giftby Decoy.foreign investors with tax breaks. This also puts the cart before the horse. Among emerging market NDFs, rupee contracts are the second most popular after the South Korean won, with a19% sharemarket of $ 250 billion per day, according to a 2019 survey by the Bank for International Settlements.

The price signals that these offshore derivatives end up becoming a headache for a central bank trying to run a controlled domestic currency during times of balance of payments stress, such as the 2013 taper tantrum. Rather than wanting that these potentially destabilizing flows are approaching, India should instead deepen the onshore rupee market in Mumbai, but also pay more attention to interest rate derivatives, as have Mexico and South Africa .

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By hosting an international financial center, Singapore staged a march on rival Hong Kong, where bankers were initially against more competition. But it was not tall buildings that made the experience a success. A freely convertible currency, pragmatic regulation, a stable tax regime, the rule of law and the speedy resolution of disputes have played a huge role. (Good schools and pubs also helped.)

Opening after the pandemic, India’s economy is inundated with central bank-funded liquidity. What it lacks is the capital and the preconditions for the creation of a truly international financial center. Gujarat has never been the right place to build a global market. Devoid of any economic logic, Gift can only appeal to local wealth for a little wealth in non-taxable dollars.

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