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India’s sovereign wealth fund – the debate continues

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Should it or should it not? It has been the question for few years now. Back in 1991, this kind of discussion would have been far fetched. India was on the verge of bankruptcy when its foreign reserves were depleted and could not even cover 2 weeks imports. It was close to pledging its gold.

That forced India to open up its economy to foreign investments which did the trick. 18 years after the economy was opened, India’s foreign reserves soared to $250 billion and occasionally touching $300 billion in the best of times. The discussion now is different.

What should India do with that money? Shouldn’t it put to good use to make better returns. When country’s tap into national savings and the foreign reserves and start a fund out of it to invest or secure some of the assets overseas that becomes a sovereign wealth fund (SWF). Norway, Singapore and UAE have successful SWF’s. China too has it.

Of the countries running SWF Singapore’s Temasek (SWF) is known for its worthy investments. Temasek holds minority stakes in few Indian companies too. Where does this put India on the Sovereign Wealth Fund map? On a very sticky wicket.

India is still debating and the latest recommendation of SEBI isIndia should not start  sovereign wealth fund. Reason is simple. The capital inflow’s can reverse any time. India had $300 billion in reserves not long ago and now they are $50 billion less. Not an alarming decline but the trend should is noteworthy.

According to IMF guidelines, the forex reserves of a country should be sufficient to meet 3-4 months of its import requirements. In India’s case this import coverage is for 14 months.

According to the Greenspan-Guidotti rule proposed by former Fed chief Alan Greenspan, the reserves should be no less than the short term debt liabilities of the country. India is secure by a large margin on this ground as well. Its short term debt totals to less than 15% of the reserves amount.

According to a regression model that accounts for various influencing parameters, including capital account openness, share of imports, exchange rate flexibility, and even political stability, India had excess reserves worth $106.6 billion in 2007. (Business Week)

There are compelling arguments for India to start its fund. As per any definition India’s foreign reserves are well above the threshold. It can really use that money to good use. As per some estimates it can use anywhere between $50bn to $100 bn for this purpose.

Sovereign Wealth Fund’s are not known for their transparency and the way they operate is not completely answerable to the public. This is a not so ideal situation for corruption ridden India. We are not too sure what happens to our tax money to which government is answerable. What would happen if our politico’s run a SWF?

  1. Altaf Rahman says

    I think the best thing to do is start repaying high interest debts of the country. If we create funds out of our reserves and give it to some managers to manage, its like keeping the lamp in cyclone. Singaporeans are altogether different. What happens when we start funds is, politicians influence the selection of managers and they divert the funds to shady projects (finally ending in the pockets of politicians).

    So the best thing is to start repaying high interest debits of India.

    Also some funds should be used to come to the rescue of Indian commodities in thier wild fluctuations. Take any crop. In their harvest time prices crash (causing loss to formers) and in the lean season skyrocket (causing loss to consumers).

    Finance FCI to build massive warehouses / Silos in every district of India. It will stabilize prices. Though not benifiting Indians, it will indirectly benifit them by providing employment and buffer acting as dampener to price fluctuations

  2. The question is, why not this wealth be invested in domestic projects ?

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