State 038; money

A proposal for a sovereign wealth fund SWF is expected to be put before a group of ministers. As reported in this newspaper on Monday,the volume suggested is 10 billion and many options on how the fund could be structured are on the table. An Indian SWF would be a pot of money,controlled by the government,which will be used to purchase overseas assets. This idea is fraught with difficulties in the context of poor governance in India. Business houses will queue up to request politicians for this money to be placed in their ventures. It could become much like an IDBI or IFCI of yesteryear,where politicians allocate this money to their friends,or where bureaucrats incompetently try to be financiers.

In India,government suffers from acute problems of accountability. Our political process has abjectly failed at preventing fiscal indiscipline by one political party after another. Would it then be a good idea to enlarge the mandate of the government to husband a 10 billion SWF in the hope that this would cater to the interests of the people of India? Faced with our crisis of governance,our focus must be on delineating,and limiting,the mandate of the state,and layering on more and more accountability mechanisms. This proposal works in the opposite direction; it creates more discretion for the state.

An investment fund,if run well,requires the fund manager to be given a free hand; but,for a publicly-held fund,will a free hand be available? Conversely,if it is,what accountability mechanisms will the fund manager be subject to? Efficiency and accountability are both desirable,but will work in opposite directions. The idea itself,therefore,is internally contradictory.

Globally,democracies do not run SWFs,except for situations like Norway,where its entire revenues from oil have been placed into a fund which would support the budget over coming centuries. Barring such unusual situations,democracies build accountability mechanisms where citizens pay taxes which are used by governments to produce public goods. SWFs are a feature of autocracies,where powerful bureaucrats and politicians in places like China or the UAE derive political benefits from controlling vast assets. Building an SWF is as wrong as building an IDBI or IFCI. While some socialists might be comfortable with this notion,it is important to criticise it and block it,as a part of the process of making Indian democracy work.