Forex factor

Foregin exchange reserves amount to 250 billion. The bulk of these is held in low yielding US government securities. The idea of using reserves for infrastructure was ineffective because most infrastructure investment is domestic and does not require foreign exchange. One alternative is for India to have a Sovereign Wealth Fund SWF, a fund owned by the Indian state and invested abroad. India can today easily invest 100 billion abroad and earn high returns on its reserves. Countries such as China, Russia, UAE and Singapore invest part of their forex reserves in private companies abroad. However, considering that these are not democratic governments, their choice of where to invest can be non-transparent and political. For India it is important that the fund must be run by professionals and have full transparency and no political or bureaucratic discretion.

Larry Summers, one of the world8217;s savviest public policy economists, argued in his article, 8216;Funds that defy capitalist logic8217;, that these state funds can end up, unlike funds run for capitalist shareholders, not working to maximise value. This has led to fears in host countries about the interference of foreign governments 8212; that is, state funds may be investing to maximise political influence. After China purchased ten per cent of the private equity the firm, Blackstone, which is indirectly one of the largest employers in the US, there has been discomfort about such direct investment by foreign governments. Privatisation in countries like the UK and India has involved getting the government out of business. These were the countries8217; own governments. To have foreign governments owning businesses creates similar and often more difficult issues than national governments. They are even less accountable to the public.

How can India earn more on its forex reserves without becoming the target of such controversy? One option is to invest through intermediary asset managers in which there is no discretion in choosing where to invest. To maintain complete arm8217;s length from politicians and bureaucrats, the government should invite bids from global index fund managers and the five lowest bidders should be asked to invest on behalf of the government. However, they should not have the right to invest in the stocks of any single company of their or somebody else8217;s choice. They should be able to buy only index funds. That way, India could earn much higher returns on its forex reserves without appearing to be a political threat to any other country.