The SWF fix

The government has decided to set up a sovereign wealth fund. The objective is to acquire strategic resources that enable economic growth but are finite in supply. To sustain India’s economic growth and development,in the long run,it will become imperative to source such resources globally. Ensuring sustained long-term supply of these resources requires engagement on an international scale. This requires prior coordination between diplomatic,ministerial and financial entities in the country.

Countries such as China,Russia,UAE and Singapore invest in private companies abroad. Strategic resources are often bought by their public-sector companies. However,considering that these are not democratic governments,for them to choose where to invest can be a non-transparent and political decision. Unlike funds that are run for normal capitalist shareholders,sovereign wealth funds carry the danger that they may not work to maximise value. In fact,this has led to fears in host countries about interference of foreign governments which are investing to maximise their political influence. There has been discomfort about such direct investment by foreign governments leading to the Santiago Principles,which seek to regulate SWFs’ investments. Also,on an international scale,democracies do not run sovereign wealth funds — with exceptions like Norway,where the government placed oil revenue into a fund which to support the budget over the coming years. By their very nature,sovereign wealth funds thrive in autocracies,where powerful bureaucrats and politicians derive political benefits from controlling vast assets. Several countries,including the United States,Canada,Australia,and Germany,have introduced substantial legislative changes in order to screen and restrict investments by sovereign wealth funds and other state-owned entities. India would,in all likelihood,be competing with China in resource-rich developing countries in Africa and Central Asia for acquiring mines and oil fields.

To bid for strategic resources across the world,a system of coordination and cooperation between ministries and public sector undertakings,standardised legal and financial structures should be in place. This does not suggest a need for an Indian sovereign wealth fund — it suggests the need for broad-ranging reform on strategic investments by public sector companies,their financial capabilities and strategic coordination across different ministries. This could very well be served through an empowered group of secretaries of relevant departments and ministries,than set up a new institution by way of the proposed fund.