SOVEREIGN WEALTH FUND & INDIA

2011-10-08T14:12:00.000+05:30

A sovereign wealth fund (SWF) is a government-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets.

The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, Special Drawing Rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.

The first SWF was the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues. According to many estimates, Kuwait's fund is now worth approximately $300 billion.

India and SWF

India has never had SWF in past but for long a proposal to have SWF has been around. RBI has been apprehensions of the fact given the state of balance sheet of Indian government. India Inc has favored the country setting up a sovereign wealth fund to service the needs of fast growing economy, especially the infrastructure and energy sectors, says a survey. The survey conducted by Assocham revealed that a majority of the respondents surveyed pegged the size of sovereign wealth fund (SWF) at USD 50 billion. RBI has set aside $5 billion from its foreign exchange reserves for financing infrastructure, which is routed through India Infrastructure Finance Company (IIFCL)

Why should India have SWF?

India is the only BRIC nation that does not have a SWF. India's reserves, now a little more than $319 billion, up by more than $36 billion in one year, make it the seventh biggest reserveholder in the world. It said that SWFs are becoming increasingly important in the international monetary and financial system.

Our reserves are invested in foreign currencies like dollar, pound and euro where the current rate of interest is 1-2%. The Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds, said in its an annual review published on Tuesday that annualized rates of return measured over a period of 20 years increased to 7.6 per cent on the back of global economic growth, compared with 6.5 per cent in 2009. Its 30 year annualized return in 2010 was 8.1%.

China Investment Corporation has SWF of $400 billion to buy natural resources. CIC also has stakes in firms that posses advanced technology.

India being a fast growing nation, its demand for energy will be increasing exponentially for which it has secure natural resources abroad to prevent it from global volatility and reduce its foreign dependence.

We don't need to go the way of the Abu Dhabi SWF, whose size is nearly six times its foreign exchange reserves, but start with a fraction of our reserves, say, one-fifth. With the rest of the reserves intact, there's no need for the SWF to perform any currency stabilization function; the reserves can take care of that. The SWF can then concentrate on investments.

What are the problems preventing India from having SWF?

The critical difference between India and other countries with SWF is that their investment vehicles are built on the back of fiscal and current account surplus. In contrast India runs a large fiscal deficit which is expected to be 4.6% of GDP in FY12, and current account deficit of about 2.6% of GDP.

Though India has a forex reserve of about $319 billion, a large of part of it is in the form of borrowed sum from private sector firms, NRI deposits and FIIs, which is highly volatile. SWF are ideal for countries who arte exporters of capital.

Despite all the problems that India faces we still can star a SWF with at least 1% of our foreign reserves to get a better return and secure more resources.

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SOVEREIGN WEALTH FUND & INDIA