Zara hat ke, zara bach key, yeh hai Shanghai meri jaan

China has stolen a march over India in yet another area.

In September it launched the Shanghai Free Trade Zone as a Hong Kong-like enclave on the mainland, where capital and commodities would flow freely, whereas India’s plan to make Mumbai an international financial centre died a quick death.

A 2007 blueprint, commissioned by Finance Minister P Chidambaram, did not even get the courtesy of extensive debate. The plan was bold in vision. It foresaw Mumbai ’not as an offshore appendix but as a metaphor for deregulating, liberalizing and globalizing all parts of the Indian financial system at a much faster rate.’ As a continental economy, India must become a producer and exporter of international financial services and capture an increasing share of this rapidly growing market, it said. To achieve this, Mumbai must compete with global financial centers in New York, London and Singapore, in two phases, by 2020.

Mumbai’s champions said Indian clients had bought international financial services worth $13 billion in 2005. They estimated the purchases to rise to $48 billion, and even to $70 billion, if the economy grew at 9 percent. In those days of giddy growth, they had not expected the country’s reformers to lose vim and the economy to sputter.While Mumbai’s plans have stayed on paper, China has begun serious experimentation. The Shanghai zone is a 29-sq km stretch in the business district of Pudong, which was developed after the Tiananmen Square massacre of democracy-seeking student protestors, to rev up the Chinese economy and counter the drag of western sanctions.

China’s central bank is expected to formally launch financial liberalization there by March, and extend the model to the rest of the mainland in course of time. This is a classic Chinese method of opening up. Agriculture collectives were disbanded and farmers were allowed to grow on household plots, after a group of poor peasants secretly took the initiative, thirty-five years ago in the province of Anhui. A closed economy was opened up to foreign investment first in the special economic zone of Shenzhen in 1980, with spectacular follow through results.

The Shanghai zone has the personal endorsement of Premier Li Keqiang, who wants it to be the crucible for bolder financial reforms. Mainlanders will be allowed to set up resident free-trade accounts inside the zone which would enable them to invest in foreign assets and equities. The response so far has been lukewarm. Only 38 of 1,400 firms registered in the zone, about three percent, were foreign-owned at the end of November, the South China Morning Post reported.

Foreigners fear the validity and enforcement of contracts, and the impartiality of courts adjudicating disputes with local business partners, the Post said. Some observers said that the Shanghai government would make gradual changes while others felt that if the central government was keen it could overhaul the entire legal system. To begin with it could set up an international court of arbitration and allow a more independent judicial system in the Shanghai zone. This may not be a wholesale replication of the Hong Kong model (where British common law holds, the judiciary has a history of independence, and rule of law prevails), but one with Chinese characteristics.

The project has also run into opposition from regulators, who fear loss of power. A plan to allow foreign futures exchanges like the London Metal Exchange to set up warehouses or delivery points was abandoned to protect local exchanges, the Post reported. It was unsure whether the securities regulator would allow the Shanghai Stock Exchange to create an international board inside the zone where foreign corporate giants could float yuan-denominated shares. Do remember that the Chinese stock market is sequestered between local and foreign currency trading; there are still too many controls and barriers.

As against this, Mumbai already boasts of a seamless capital market where the rupee is fully convertible for foreign investors. Mumbai also has the advantage of location; it cantrade with Asia and Europe during daytime. India has human capital and mindshare, as Indiansare employed in large numbers in global financial services firms. A mature democracy, a legal system based on British common law,a strong securities market and advanced trading platforms could have been “game, set and match”.

But a lot needs to be done before Mumbai can get there. First of all, India has to follow stable and credible macro-economic policies. It has to cut the fiscal deficit, both at the central and state levels. The public debt to GDP ratio has to shrink. India has to move towards “near capital convertibility”. Mumbai’s infrastructure and governance has to improve to attract international talent and permit world-class lifestyles. Law enforcement has to be strict, with no laxity in security. The city needs to become tolerant to all communities and welcoming of migrants.

In short, Mumbai has to become a metaphor for national purpose and determination, for it to convert its “natural lead” over Shanghai into an enduring success. Alas!