So what will it take to turn Mumbai into a major international financial hub? Much of the debate appears to have focused on how financial regulations can be changed in order to attract flows of international capital. Suggestions range from capital account convertibility to greater freedom to trade complex derivatives. Some of these suggestions are indeed pertinent but they miss the bigger picture — successful financial hubs are first and foremost “global cities” that act as clusters of human capital. Success depends entirely in the ability of a city to bring together talent because modern cities exist for the needs of people and not the needs of production. If the right people come, the economics follows.

In order to understand this point, one needs to step back and ask the basic question — why do cities exist at all in the 21st century? After all, the telecommunication revolution should have removed the need for people to congregate in expensive and congested urban agglomerations. Yet, certain kinds of cities have thrived even as they have become ever more expensive. There are two inter-related explanations. First, we have learned over the last decade that cutting-edge economic activity still requires face-to-face interaction because innovation, creativity and trust cannot be codified and e-mailed. Second, cities provide a clustering of amenities necessary for sustaining modern lifestyles — schools, hospitals, theatres, airports, restaurants and so on. Humans are social animals and crave this concentration.

Thus, cities that succeed in encouraging human interaction and lifestyle will also succeed in creating the cluster of human capital necessary for being a successful financial hub. Note how London remains the world’s shipping hub although it is no longer a port. This is because so much of the legal contracts, finance, insurance are arranged in this city. In the same way, its success as the world’s financial hub has little to do with the success or failure of the London Stock Exchange. London’s success is far more related to its ability to attract talent (the richest Indians, Russians, Arabs all have their homes in London). This in turn derives from its charm as a cosmopolitan place to live. In short, London’s success is more due its restaurants, theatres, the nearby universities of Oxford/Cambridge, the historic buildings, the museums and so on.

So, what does this mean for

Mumbai?

First, it must be an attractive place to live for the talented. No amount of tinkering with financial regulations can compensate for the lack of schools, quality housing, public transportation, parks, museums/art galleries and so on. If these issues are not tackled, it is entirely possible that we get a vibrant stock-market but none of the gains from having a major international financial hub — financial players can quite easily live in Singapore/ Dubai and trade in Indian markets.

Second, every effort must be made to ensure that the city’s human capital does not de-cluster. Rent-control and road congestion in South Mumbai has steadily forced the economically active population to scatter. Thus, there has been a de-clustering of business activity to secondary hubs like Bandra-Kurla. Some de-clustering is acceptable and even necessary but it must be recognised that this process reduces the intense human interaction that defines southern Manhattan and London’s City. In short, too much de-clustering would simply miss the point of being a hub.

Third, Mumbai needs more tertiary educational facilities, both inside the city and within easy reach. Education is one way to attract the talented as well as to endogenously generate new talent. Note, however, that a financial hub does not just require a plethora of finance institutes. A great “global city” is a good generalist rather than a specialist. We need to allow for everything from fashion design and art appreciation to medicine. Since it is not possible to predict the future course of innovation, this requires the deregulation of the education sector so that the supply-side can respond quickly to evolving requirements.

In short, making Mumbai a successful international financial system requires that we think about how to make it a vibrant and attractive city. ‘Attractiveness’ is not just about physical aesthetics but about the ‘soft’ factors that encourage the talented to converge and interact. Manhattan is grey and dreary but it is undoubtedly an exciting place. If India’s business and political elite want to Mumbai into a real global financial hub, they should worry more about building schools, hospitals and art galleries — the financial regulations will sort themselves out over time.

The re-development of the Parel mill lands was a golden opportunity to have created a vibrant and dynamic urban milieu in the heart of Mumbai. Unfortunately, the opportunity was lost and now we have yet another haphazard locality with few public spaces or amenities. Fortunately, in the not too distant future, we will probably have yet another opportunity when the port area on the eastern seaboard becomes available (as we have seen ships have little to do with being a shipping hub). An intelligent plan for this large space could go a long way to remake Mumbai as a competitive financial centre. An open public debate about this is urgently needed.

The writer is an economist with a leading global bank, and an Eisenhower Fellow on urbanisation