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FinMin discards sovereign wealth fund proposal

Believes there is no need for it as domestic markets are enough for govt to borrow funds

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The has scrapped a proposal to set up a sovereign wealth fund (SWF) because there was “no need for it”, at least for now.

The ministry said the domestic markets have enough depth for the government to borrow funds to finance the fiscal deficit, and companies can tap external markets for borrowings.

“At the moment, we are not planning an SWF. We don’t think there is a need for it,” Economic Affairs Secretary Arvind Mayaram told Business Standard. There was never a plan to set up an SWF, he said. “There were discussions. Plan means we decided and shelved it.”

Mayaram said there was no requirement for such a fund at the moment. “SWF is either required to raise money to fill the (fiscal) deficit because the domestic market is not adequate to do that or it is required because the could not attract funds for foreign investors. To us, neither of those conditions exist.”

The government’s deficit in any case, as the ministry has said, is going to come down, he added.

The government has projected the Centre’s to be lower at 4.8 per cent of gross domestic product (GDP) next financial year from 5.2 per cent estimated for 2012-13. Even for the current financial year, the estimated deficit was lower than 5.3 per cent, pegged in the five-year fiscal consolidation road map. The road map seeks to bring down the deficit to three per cent by 2016-17, the terminal year of the 12th five-year Plan.

“To that extent, our requirement for government borrowing as a percentage of GDP will go down. We expect the savings rate to go up, in which case, there would be much more money available and the government borrowing would be much less. We don't need to go abroad. Our capital markets are strong, our G-sec (government securities) market is strong. In fact, G-sec market is much in demand,” Mayaram said.

There was some confusion over the amount of gross market borrowing in the Budget for 2013-14. In the receipt budget, the amount was shown as Rs 6.29 lakh crore. However, the ministry later came out with a clarification that borrowing was pegged at a little over Rs 5.69 lakh crore, as Rs 50,000 crore relates to the buyback and switching of securities. For the current financial year, the revised estimate pegged gross market borrowing at Rs 5.58 lakh crore, which means the budget estimate was just two per cent higher than the revised estimate of 2012-13.  

Mayaram said SWF would also be needed in a situation where corporates were not able to raise money abroad. “The evidence is contrary. Rather, we have capped ECBs (external commercial borrowings).”

There were a couple of proposals to set up SWFs. First, it was mooted that a fund be created out of foreign exchange reserves. Then, it was mooted that it be set up from budgetary resources with an initial corpus of Rs 1,000 crore to buy assets in natural resources, such as coal blocks, overseas. It was proposed that SWF can take the form of a company. Besides the government’s contribution, the new entity could raise funds from the market or use surplus cash lying with the public sector units, it was proposed.

are typically created by countries that have huge foreign exchange reserves. China, Norway, Singapore, Saudi Arabia and other oil rich nations in West Asia have large SWFs. They buy equity, gold or other assets in the domestic and overseas markets.

For example, the Government of Singapore Investment Corp and Temasek are two SWFs in Singapore.

The total value of SWFs globally could be over $5 trillion. SWFs are generally carved out by foreign exchange reserves.

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