Before going on to the topic that whether India needs a SWF or not let’s first try to understand what is a SWF. A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial assets. These funds are run by professionals and buy assets in other countries on behalf of the parent country. Most of the SWF owns financial assets like stocks and bonds, one of the well known, sovereign fund having its strong hold in India is Temasek owned by the government of Singapore. In fact recently SWF’s have proved to be a big saviour to the cash starved global markets. The ongoing financial and subprime crisis eroded networth of giants like Citibank and UBS to name few. These banks were in dire need to raise funds and were bailed out by SWF.
So now since we have got a brief idea of SWF’s the question is in the world of globalisation does India require a SWF? I put this question to you’ll my readers what do you think? Do we require a SWF? Do we have enough money to have a SWF. Average size of a good SWF at the start would be atleast $20-30$ billion. Can we use nearly 10% of our forex reserve for SWF.
The above question was recently raised in the Lok Sabha by a MP and as usual there was a uproar. Taking cue from this couple of months ago Iasked this question in front of a close friend, who also happens to be in the financial market. He is of the view that India should not have a SWF as we don’t have enough money for ourselves and our development so it would not make sense to waste 10% of our reserves in SWF. Instead he suggested that part of the forex reserves should be deployed in infrastructural development. Something Chidambaram has mentioned in his book a compilation of his articles between 2002/2004. But alas he himself has not followed what he preached. I think the point made by my friend is valid and is something that most of the economists are suggesting.
But I have a different perspective on this topic. I think India requires a SWF. I know if Mr.Karat or Mr.Yechury would read this they would be fuming with anger but the fact is that we are in need of a SWF. Lot of you would ask me why and what would be this SWF be of use. Well my idea of SWF is a bit different from the one that the government of Singapore or Kuwait has. I guess the government of India needs to have an investment management company of its own u can name it as a SWF or Special Purpose Vehicle (SPV). The way this Investment Company would be different from others would be the nature of the company. India doesn’t need a SWF to buy stocks and bonds of companies abroad I think we have enough world class companies in the country itself. But India needs a SWF to buy assets abroad. Now what do you have to say do we need it or not?
Well let’s look it this way India is growing at 8% requires energy to fuel this demand, needs food to meet the ever increasing appetite of its people, requires industrial metals for infrastructure, needs more coal than what we use today to fulfil the dream of power for all. If I summarise all these things one thing that comes out is the demand for commodities from India is bound northwards. So if we need more oil we need to import it which means higher deficit for the government, if we need more coal we have bottlenecks in our country so will have to import, more food grains imports. Over all the import burden would rise.
What would this $20 bn (size of SWF is always debatable) do is that it will give us good opportunity to buy assets overseas. For eg: I have read lot of times that ONGC bids for oil blocks in Sudan but looses out to Sinopec. If we are able to use out forex reserves in a concrete way it will make a difference. Buying oil blocks internationally would reduce our import bills. So is for any other metal India would require more Iron ore for steel there are enough iron ore mines in other countries which can be bought. I could give ample amount of examples to support my stance but the fact is that we need more commodities to meet our growing needs and this is likely to increase the conundrum. This can only be solved either by importing more which means higher deficit and large subsidy bill or by increasing supply something which is not in India’s hand at least for some of the important commodities. Which means the only way India could solve the problem is by assets internationally and this can be solved by a SWF.
I leave you my readers with this question that should India have a SWF? I would like to read your views on it. We could have diverse views but this is a topic of debate and something that needs to be taken up in corridors of power.
2 comments:
Well written article, good work, will give more detailed feedback in office!
The idea seems to be perfect that India should have SWF. But, if we look deeper into the real picture, we will realize that there are various ways to use our reserves. First, let me ask this question, why is India’s reserve swelling? Our reserves represent the excess of capital flows over the current account deficit. We cannot term this our gain. It’s a liability. We cannot compare ourselves to China as their reserves represent large-scale current account surplus. India still has enough opportunities to invest in. This is the reason every company wants to invest in India. India requires massive investment in the domestic front and the expected returns are also high apart from social returns.
Our reserves are not stable. If capital can flow in, it can even flow out. I would suggest that rather than forming a SWf we should form an SPV to spend it on infrastructure building. As far as rising commodities are concerned, we cannot go and buy farmland to cultivate. Instead, government should look towards futures market to hedge the risks of rising commodity prices. Private and PSU companies are already invested in foreign companies and countries and are trying their best to invest more to secure domestic supplies of say crude and iron ores. Only thing that can be done is to make rules more flexible so that these companies can raise more funds to invest abroad.
The other way to tackle our huge reserves is to create a special purpose vehicle (SPV) type fund, which will borrow funds from Reserve Bank of India in the form of long-term securities in foreign currency and lend the same to Indian companies at lower rates. Thus, RBI and the government will be able to earn more on forex reserves than it is earning now on US treasury bills.
The other reason to avoid SWF is political instability. In India, different political parties have different ideologies on free market. So, it will be very difficult to save SWF if Left party comes to power.
India’s large foreign exchange reserves reflect an inability of the economy to fully absorb capital inflows, whereas most countries that had set up sovereign wealth funds had built reserves through persistent current account surpluses or revenue gains from commodity exports.
The only reason I can see why India should have a SWF is to demonstrate its super power as India is a growing economy and is expected to be a super power in near future.
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