Why GIFT City matters for India’s next phase of global capital flows

The Gujarat International Finance Tec-City (GIFT City), situated in Gandhinagar, Gujarat, represents a visionary initiative to establish India's first operational International Financial Services Centre (IFSC). Conceived with the ambitious goal of placing India on the global financial map, GIFT City is designed to be a hub for financial services and a smart city, integrating urban development with financial infrastructure. The idea for an Indian IFSC gained traction due to the significant financial services business that was historically conducted offshore by Indian entities, incurring costs and regulatory arbitrage challenges. The vision, dating back to the mid-2000s, aimed to 'bring back' these financial flows and create a competitive environment that could rival established global financial centres like London, Singapore, and Dubai.

What truly sets GIFT City apart is its function as a crucial 'offshore-onshore' bridge. It offers a globally aligned investment platform that simplifies processes for Non-Resident Indians (NRIs), institutional investors, and the Indian diaspora to invest in India. This involves providing an ecosystem that boasts strong regulatory support and attractive tax-efficient structures. Since its inception, GIFT City has seen rapid growth in fund registrations and the establishment of various financial entities, including banks, insurance companies, asset management firms, and capital market intermediaries. Its strategic location and state-of-the-art infrastructure are designed to attract significant global capital, thereby enhancing India's integration into the global financial system.

Key stakeholders involved in the development and operation of GIFT City include the Government of India, which provides the overarching policy framework and strategic direction, and the Government of Gujarat, which has been instrumental in providing land and infrastructure support. A pivotal role is played by the International Financial Services Centres Authority (IFSCA), established in April 2020 under the International Financial Services Centres Authority Act, 2019. The IFSCA acts as a unified regulator for all financial services in IFSCs in India, consolidating the regulatory powers of RBI, SEBI, IRDAI, and PFRDA concerning entities operating within GIFT City. This unified regulatory approach streamlines compliance and provides a single window for approvals, making it highly attractive for financial institutions. Other crucial stakeholders include the various domestic and international financial institutions that have set up operations within GIFT City, and the investors, both institutional and individual, who leverage its platforms.

For India, GIFT City holds immense significance across economic, political, and strategic dimensions. Economically, it is poised to attract substantial foreign direct investment (FDI) and foreign portfolio investment (FPI), boosting capital inflows and strengthening the rupee. It aims to create a robust financial services ecosystem, generating high-skilled employment opportunities and fostering innovation in areas like FinTech. By offering competitive financial services, it helps reduce India's reliance on foreign financial centres for various transactions, from syndicated loans to offshore derivatives. Politically, GIFT City underscores India's commitment to economic reforms, ease of doing business, and its aspiration to become a major global economic power. Strategically, it positions India as a regional financial hub, potentially serving as a gateway for capital flows into and out of other South Asian and African economies. The tax incentives, such as a 100% tax exemption for 10 consecutive years for IFSC units, exemption from Goods and Services Tax (GST) on services between IFSC units, and no capital gains tax for certain transactions, are powerful draws.

Historically, India has always sought to manage its capital account carefully. While the Special Economic Zones (SEZ) Act, 2005, provided a framework for economic enclaves, the specific need for a dedicated financial SEZ led to the conceptualization of an IFSC. The Foreign Exchange Management Act (FEMA), 1999, remains crucial as it governs foreign exchange transactions, and operations within GIFT City are designed to be FEMA-compliant while offering regulatory flexibility. The establishment of IFSCA through the IFSCA Act, 2019, was a landmark step, providing the necessary legal and regulatory certainty for the IFSC to thrive.

Looking ahead, GIFT City has the potential to significantly contribute to India's ambition of becoming a $5 trillion economy. Its success will be crucial for diversifying India's financial offerings, expanding its global financial footprint, and making it a preferred destination for international capital and financial innovation. Future implications include further development of niche areas like aircraft and ship leasing, bullion trading, and sustainable finance. Challenges remain, including intense global competition, the need to continuously evolve its regulatory framework, and attracting top-tier global talent. However, with sustained government support and a proactive regulatory body, GIFT City is well-positioned to become a cornerstone of India's financial future, embodying the nation's rising economic prowess on the global stage.