What are Sovereign Wealth Funds? Why the sudden glare of publicity? Can India start one and will it be good for the nation?
What are SWFs?
Sovereign Wealth Funds (SWFs) are part of a country’s foreign exchange reserves that have been separated to invest in global equity, infrastructure, commodities and other financial instruments. Your country holds several billion dollars in forex reserves. Normally, these would just lie there, growing at a paltry interest rate. SWFs are a way to improve the country’s finances as well as hedge against future crises.
Who’s using SWFs?
SWFs are not new; Kuwait and Kiribati have had them since the 1950s. Today there are 30 such funds in the world. Abu Dhabi, Norway, Yemen, Qatar, Saudi Arabia, China, Russia and Singapore are some countries that are successfully using this instrument. Abu Dhabi has the biggest, with over $600 billion being managed. Norway in fact has a ‘fund of funds’ of sorts; it helps other countries invest their money.
SWFs became famous when in May this year, China bought up 10% of the American Blackstone Group for $3 billion out of its SWF. Soon after, Qatar bid to buy J Sainsbury, a British retailer. The West fears that emerging economies could buy out firms in ‘sensitive’ sectors or take over their infrastructure.
It is estimated that over $2.5 trillion has been placed in Sovereign Wealth funds worldwide. Analysts believe that this figure can increase to anything between $8-17 trillion by 2011. In fact, financial services firms are scrambling to position themselves as Sovereign Wealth Managers.
Can India create an SWF?
India has $260 billions in forex reserves, but has not yet ventured into SWFs. Can India create one? Most certainly, yes. But it would be prudent to allocate only a small portion of India’s reserves to this, as current account needs have to be addressed.
Also, the question of who will administer and manage the fund will need to be clarified; it will be no easy task. India’s risk tolerance is another prickly issue; the rising rupee is already reducing the size of the reserve corpus.
Can India succeed in starting and maintaining a Sovereign Wealth Fund? How do you think the money should be invested?