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The future of finance in India

16 May 2023 | 5 minute read

India’s rise on the world stage has been impressive. According to the International Monetary Fund, India’s economy is now the fifth largest in the world after a forecasted growth of 7% last year. It’s also predicted that by 2027, India will surpass both Japan and Germany to become the third largest economy in the world, and by 2030 will have the fifth largest stock market with a market capitalization of about $10 trillion.

When we discuss the future of finance in India, a must-mention from an investor perspective is the Gujarat International Finance Tec-City (GIFT City), in Gujarat State. It is built on the banks of the Sabarmati river and home to India’s global bullion exchange and its maiden International Financial Services Centre (IFSC).

In this article, we’ll take a look at what makes GIFT City unique, and why India could be a top jurisdiction for fund managers and investors.

What is GIFT City?

Located between the business capital, Ahmedabad, and the political capital, Gandhinagar, GIFT City is India’s first smart city, sponsored by the Indian government. It’s dubbed as the ‘FinTech gateway of India to the world’ on the official website, and it certainly has the credentials to back the claim. First conceptualised in 2008 by Prime Minister Narendra Modi, then the Chief Minister of the State of Gujarat, GIFT City offers a range of enticing tax incentives and state subsidies.

According to the Union Government, the city has the potential to create 500,000 new jobs and another 500,000 indirectly as the growing financial industry will be boosted by new companies attracted to the development.

A special economic zone

GIFT City’s IFSC was declared a special economic zone (SEZ) in 2015 to position the smart city as India’s main financial hub.

With the Indian economy reaching the $3 trillion mark by end-March 2023, the IFSC hopes to address the lack of convertibility of the Indian Rupee. The GIFT City is exempted from most of India’s stringent currency regulations thus encouraging onshore trading of Indian assets which are currently done offshore through derivative financial instruments. This is also expected to significantly offset the effect of offshore trades on the rupee exchange rate.

GIFT City being an SEZ, it caters to a slew of tax and other incentives to attract foreign and domestic investments. These include:

  • Income tax benefits, including 100% tax exemption for 10 out of 15 years, and dividend paid to shareholders of companies in the IFSC. For investors, interest income paid to non-residents on (i) monies lent to IFSC units is not taxable, and (ii) long term bonds and Rupee denominated bonds listed on IFSC exchanges is taxable at lower rate of 4%
  • No Goods and Services Tax (GST) is received by units in the IFSC or provided to IFSC/SEZ units or offshore clients. For investors, there’s no GST on transactions carried out in IFSC exchanges
  • State subsidies for lease rental, pension fund contribution and electricity charges

Influencing price-setting of gold

GIFT City is home to India’s first global bullion exchange, India International Bullion Exchange (IIBX). Prime Minister Modi was quoted to have said, “Integration with the global markets and supply chain is our major agenda. GIFT City is an important gateway to it. This will help make India a financial superpower.”

India is the largest importer of gold in the world, and the second largest consumer, but also has a substantial unregulated grey market. By launching IIBX, the government aspires India to eventually set the price standard of gold internationally. IFSC as the regulator for IIBX’s international transactions, would aim to establish a better organised financial trade in gold while ridding the market of inefficiencies and grey-market influences.

An international arbitration centre

Last year, it was announced that GIFT City is set to launch its own international arbitration centre to increase the rate of dispute resolution and be on the lines of other international arbitration centres in Singapore and London for instance. A reliable facility such as this one is an important aspect of international business and finance. It will not only attract global business, but also investors who can be assured fast disposal of disputes in international jurisprudence and avoiding repetitive appeals.

Education as an enabler

Skilled manpower is crucial to sustain business in GIFT City, and the government is planning to set up universities and education centres to develop capacity in financial management and FinTech. Speaking to the Economic Times, Finance Minister Nirmala Sitharaman said, “The setting up of world-class universities without any domestic regulation will facilitate skilled manpower in the financial services space.” In addition, the government approving the second phase of the Ahmedabad metro, which is a 6km line connecting GIFT city to other major cities, is a welcomed step on extending a direct and interrupted connectivity to the business hub. This enhanced connectivity will also create opportunities for the significant pool of human resources available in India and open up new avenues for similar sectors to set up units in GIFT City.

The future of finance in India

The number of funds registered with GIFT IFSC stands at 50+ and is increasing each day. According to NDTV, as of October 2022, banking assets stood at a combined $33 billion in GIFT City, and on average, daily turnover on the two stock exchanges in the financial centre climbed to $14.6 billion, up from $3.4 billion two years before.

As India earns its place on the world stage, all eyes are on GIFT City as the next investor powerhouse equipped to compete with similar business hubs like Singapore, Hong Kong, Shanghai and Dubai.

Why choose IQ-EQ?

IQ-EQ covers the entire spectrum of services for fund and asset managers for both open- and closed-end funds and provides extensive support in managing inbound and outbound strategies. With a presence in 25 jurisdictions worldwide, including India, we can provide customised, end-to-end solutions to Indian fund managers for their onshore and offshore requirements. At IQ-EQ we endeavor to act as a trusted partner to our clients, taking away administrative burden to enable managers to focus on their core fundraising and investment activities.

For more information, please don’t hesitate to contact me:

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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