SWF Debate Resuscitated in India

Ashby Monk

The “on again, off again” debate over whether India should set up a SWF is apparently back “on”. The country’s oil ministry has put in a formal request to the finance ministry to set up a SWF using a portion of the country’s $254 billion in foreign exchange reserves. According to reports, the SWF is being conceptualized by its proponents as a tool to better compete with China in the ongoing drive to secure resources:

“Chinese companies spent a record $32 billion last year buying oil, coal and metals assets abroad, while a $2.1 billion investment by ONGC was India’s sole energy acquisition.”

India has been considering a SWF since 2008. In February that year, the government established an advisory group to evaluate how a SWF might be set up. But the new fund never materialized for two reasons:

  • The generic position against was based on the fact that India’s foreign reserves come from capital inflows (not commodity wealth), which makes the country susceptible to capital flight. Alas, many felt that the country had no “excess” reserves. Indeed, because the Reserve Bank of India is  extremely cautious about shocks to the country’s current account, it was too conservative to get behind the idea of a SWF.
  • There was also a widespread fear that the SWF would become corrupt and the assets would be misappropriated.

I think these positions are justifiable.  But I’m still not entirely convinced.

  • On the first issue, the same argument could be made about China. As Bernhard Reinsberg has said , “a non-commodity SWF would be equally beneficial to India as it already is to China, given the preceding strategic policy choices to intervene in the FX market in both cases.”
  • On the second issue, governance is the crucial determinant of the success of the fund. You can’t tell me that India has a more difficult political environment than São Tomé and Príncipe (which had a coup attempt as recently as 2003). And yet, STP’s National Oil Account was recently flagged as a “model” SWF for developing countries. The governance structures that prevent corruption in STP could be adopted in India.

In my view, with the appropriate structure, India could benefit from a SWF. Indeed, most of its peers are already benefiting from SWFs (e.g. the rest of the BRICs). In addition, holding excess reserves has high costs, which can be minimized through more aggressive investing.

However, the Reserve Bank of India is extremely conservative, which means it is anybody’s guess as to whether India will actually be setting up a SWF any time soon. File this under TBD…

5 Responses to “SWF Debate Resuscitated in India”


  1. 1 rien huizer March 17, 2010 at 10:59 pm

    It is funny, but the taxonomy of SWFs may require further complication.

    ” As Bernhard Reinsberg has said , “a non-commodity SWF would be equally beneficial to India as it already is to China, given the preceding strategic policy choices to intervene in the FX market in both cases.”

    I think that this is not a non-commodity fund at all , but an instance of a fund that is linked to commodity imports (by securing access/control re resources in foreign countries). The traditional commodity funds are linked to the export of commodities.

    Now suppose that the world consists of six countries (and one commodity) Two countries are semi developed commodity exporters, two are semideveloped importers (and export manufacturers and one, quite large, plays a balancing role and has a huge, highly developed financial sector. The former four peg their currencies to the balancer country’s. The sixth country is hopelessly underdeveloped, unpopular with investors in the balanced country but may be rich in unexplored commodity.The importers a suffer from the exporters (who form a cartel) stock of revenue being recycled towards them, augmented by hot (leveraged) money from the balancer country (based on expectations among investors that the importers will raise productivity and their terms of trade and the importers will break the peg) via the balancer country’s financial sector. They sterilize the inflow in order to maintain their peg with the balancer country. After a while they get a visit from an investment banker from the balancer country who explains the virtues of creating an SWF out of the excess reserves resulting from sterilization. That SWF should invest in the fifth country: great returns and higher world supply of commodities, which would mean even stronger terms of trade (and ultimately a bonus for the speculators in the balanced country who borrowed from the commodity exporters SWFs) when the importers decide to no longer defend their peg with the balanced country. What can the commodity exporters do? Cut production to raise the potential returns for investors in the poor country? Do the same, have their SWFs switch their stock of investment into bribing the poor country’s gvt/preempting importers’ investment(thus also choking off the speculators in the balanced country before their gains become meaningful)?

  2. 2 Ashby Monk March 18, 2010 at 3:23 pm

    Let me think about this for a couple of days…very interesting scenario!

  3. 3 Ashby Monk March 19, 2010 at 9:08 am

    My brain hurts thinking this through…but I think I’m following you. Everything in this scenario revolves around 1) the peg; 2) the notion that the importing countries will continue to receive investment; and 3) that the “fifth” country can replace the exporters’ commodities. Am I right?

  4. 4 rien huizer March 23, 2010 at 11:19 pm

    Almost: as the importers get more productive, they start to accumulate export receipts over and above their development needs (imports of capital goods etc, unless they grow too fast(like Korea once)especially when there is a lot of FDI (like in Spore and PRC, which comes from Balancer, the main buyer of Importers’ exports, not Commodity Exporters). That (and hot money if industrialization in Importers is financed by FDI) puts upward pressure on the peg, leading to sterilization, leading to a hard core of gvt savings (or centralized ones), which can be invested longer term, but also can be invested in a competitor to Commodity Exporters, precisely as China is doing now. If Importers’ strategy to displace Exporters’ grip on pricing works, there are also threats to Balancer, because Balancer benefits financially from the situation (though at the expense of international competitiveness).


  1. 1 Very Different Countries, Same Constraint « Oxford SWF Project Trackback on July 21, 2010 at 11:33 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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