For a long time, there has been a realisation that India’s policy mistakes on capital controls, financial regulation and taxation will induce a hollowing out of Indian financial markets. Here is an example from May 2012. The two most important products are Nifty and the rupee, and these are increasingly dominated by overseas activity. Non-residents have a clear choice about where they wish to send their order flow and locals are also known to evade capital controls and take their custom to more competitive venues. There is an amplified concern about these problems this week – see Mobis Philipose in Mint and my article in Business Standard.
These developments are good for the real economy, as superior mechanisms of financial intermediation are displacing the inefficiencies of the onshore financial system. This reduces the cost of doing business for foreign investors.
But at the same time, we in India are losing massive financial service exports as the business is shifting out. On the rupee, the estimated loss of revenue for India is around Rs 60,000 crore per year. Similar values are likely to prevail for Nifty.