September 17, 2024
📰 FEATURE STORY
Should India have its own sovereign wealth fund?
The concept of a sovereign wealth fund has attracted some attention as more countries open funds and invest in big-name companies and assets. Having a state-owned pool of money is seen as advantageous since surplus funds don’t lie dormant and can be used for investment purposes.
India is reportedly getting ready to have its own sovereign wealth fund as the government has begun initial discussions with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) regarding its viability. It’s part of a broader strategy to position the country as a $30 trillion economy by 2047. Does this make sense for India?
Context
Sovereign wealth funds emerged as a solution for a country with a budget surplus. The first such fund was the Kuwait Investment Authority, established in 1953 to invest excess oil revenues. There wasn’t much activity until three new funds were created – Abu Dhabi’s Investment Authority in 1976, Singapore’s Government Investment Corporation in 1986, and Norway’s Pension Fund in 1990.
Over the past few decades, the number of funds has ballooned to 176, with accumulated assets of over $11 trillion as of last August. There are two types of funds – commodity and non-commodity.
The former is financed by exporting goods. When the price of goods increases, the country will have a greater surplus. When the price is reduced, there could be a deficit. Non-commodity funds are usually financed through an excess of foreign currency reserves.
While wealth funds don’t reveal their complete portfolios, it’s usually invested in government bonds, equities, and Foreign Direct Investment (FDI). However, several funds now choose alternative investments like hedge funds and private equity.
In general, sovereign wealth funds represent a growing portion of the global economy. It’s part of the reason there’s some opposition to countries having them. Following the 2008 financial crash, sovereign wealth funds were used to rescue struggling banks like Citi Group, UBS, and Morgan Stanley. Some worried that foreign countries had too much control over domestic financial institutions.
Several US and European lawmakers have lobbied for regulations on sovereign wealth funds. They fear these funds are a national security threat. With more doubts cast on globalisation, the pandemic, and geopolitical conflicts, countries have focused on reevaluating their economic goals.
India is one of those countries. Given its financial ambitions and growing influence, the government sees it as a good move. It has sought feedback from 30 Public Sector Undertakings (PSUs). The initial proposal suggests that a $5 billion fund could generate $10 billion worth of investments.
VIEW: It’s necessary
In the aftermath of the 2008 financial crisis, the International Monetary Fund (IMF) urged the creation of a forum for sovereign wealth funds to help stabilise the global financial world. Let’s take China as an example. Despite having large foreign exchange reserves, the realisation was that it relied solely on foreign debt, which was unwise. It then launched the Belt and Road Initiative. It also financed infrastructure projects in developing countries through Chinese loans for diplomatic goodwill. A few sovereign funds were created as part of this strategy.
As far as India is concerned, such a fund would help manage a portion of its foreign exchange reserves rather than invest them in American or European securities. This could generate higher financial returns, support external projects funded by Indian foreign aid, and help gain access to technologies related to energy transition, quantum computing, space applications, etc.
While most funds are funded through assets, India’s foreign exchange reserves are composed of capital inflows, not surpluses. This makes them liabilities, not assets. So, the question is, should India invest using borrowed capital? The answer is yes if the return is more than the cost of capital. India’s foreign exchange reserves have always been enough to cover several months or more of imports. An important advantage of a sovereign fund is it’s cheaper than traditional banking channels and lines of credit.
COUNTERVIEW: Not advisable
Sovereign funds owned by Kuwait, Abu Dhabi and Norway derive revenues from oil and other non-renewable commodities. Given their desire to mitigate financial risks and reduce their long-term dependence on oil prices, it makes sense. India, on the other hand, doesn’t depend on oil-generated revenues. We’re exposed to oil price fluctuations since 30% of the country’s total imports are petroleum-based products. India isn’t in the position of being a large-scale oil exporter like Abu Dhabi, for example.
Countries like Singapore and China are major exporters and consistently have a current account surplus, i.e., exports are always more than imports. India isn’t in this position. There are already mechanisms to invest abroad through mutual funds governed by the RBI. A sovereign wealth fund would surely increase the fiscal deficit due to increased borrowing. India’s interest payments are already over ₹7 lakh crore annually. That’s nearly double the defence expenditure.
In a way, India already has its sovereign wealth fund. The National Investment and Infrastructure Fund (NIIF) was set up in 2016 and is managed by a government-appointed team to leverage foreign investments into India. It’s about $4 billion in size, and its investments are across sectors, including infrastructure and e-commerce. If India can better manage its domestic investments and detect potential investment opportunities abroad, the country’s national savings would serve the country better than a sovereign wealth fund.
Reference Links:
- Demystifying Sovereign Wealth Funds – IMF e-Library
- Sovereign wealth funds are playing an increasingly important role in global development – World Economic Forum
- India planning its own sovereign wealth fund to invest abroad: Report – Firstpost
- Sovereign wealth fund can enhance India’s global investment footprint, says former ambassador – CNBC TV18
- The pros and cons of a sovereign wealth fund for India | Q&A – CNBC TV18
- Does India really need a sovereign wealth fund? – Times of India
What is your opinion on this?
(Only subscribers can participate in polls)
a) India should have its own sovereign wealth fund.
b) India shouldn’t have its own sovereign wealth fund.
Previous poll’s results:
- Mamata Banerjee’s future as West Bengal Chief Minister is in doubt: 50.9% 🏆
- Mamata Banerjee’s future as West Bengal Chief Minister isn’t in doubt: 49.1%
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