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A fund of imprudence

For India, a sovereign wealth fund makes little sense

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For some years now, the idea of an has been floating around New Delhi. This was just barely understandable as an idea in the distant days before the 2008 financial crisis, when several countries seemed to be making money through canny investments, even in financial companies and stocks. Oil-rich countries like Norway, the UAE, and have long-standing investment programmes. These funds usually specialise in investments that are meant to ensure that the benefits of oil wealth is not transient. All these funds have assets of close to $500 billion (about Rs 28 lakh crore).

Clearly, the arguments for an Indian sovereign wealth fund made little sense in this context. Most obviously, India did not have a large amount of money from natural resources that it needed to invest. Nor did it have a sustained current account surplus, such as China runs. Even so, suggestions were made that some of India’s foreign-exchange reserves could be invested, rather than sitting with the Reserve Bank of India. It was reported last year that a Group of Ministers suggested setting up a fund to help acquire mineral and energy resources abroad. Now, this newspaper has reported that such a fund, with a Rs 1,000-crore initial corpus from Budgetary sources, is indeed in the offing.

This is an imprudent move. First, there is the question of where the funds would come from. Clearly not from the regular Budget, which is tight currently. The is properly concerned that India’s reserves are not what they were, and thus it is unlikely to sanction purchases being made with them. It has been suggested that it would raise money from the market, or use “surplus cash” lying with public-sector units. Neither makes much sense. If market participants wish to invest in foreign resources, why would they turn to India’s government as an investment manager? And the public-sector companies that have cash lying around are those, like Coal India, that are operating in the sector anyway. Why cannot they be empowered to make these investments themselves? If their managements feel there is a value-creating opportunity somewhere in the world, they have a responsibility to their shareholders — both the government and minority shareholders — to make that investment. Why should their shareholders be forced to sign off on the handing over of surpluses to another entity? If there is money to be made in buying offshore resources, Indian private companies should bear the risk of doing so — and the government must help develop a corporate bond market that would finance it.

It could be argued that energy-hungry India, with supply constraints at home, should look at acquisition of natural resource assets abroad. (Note that does not mean that energy will get any cheaper; merely that supply might be more assured.) Yet that does not require the purchase of entire fields —s that hardly neutralises political risk, such as was responsible for the hit to coal supplies to power plants last year. Nor should diversification of supply involve an additional layer of bureaucracy. Most sovereign wealth funds are inadequately transparent. India definitely does not need another location where private and state interests make deals that are not open to sufficient scrutiny.

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