Poking Holes in India’s SWF Plans

Ashby Monk

A couple of weeks ago, I remarked that India’s plan for a new SWF had turned the logic of a “commodity fund” on its head; instead of using the SWF to stabilize commodity revenues, as most countries do, India apparently wants a new SWF to secure commodities assets for energy security. At the time, I noted a variety of potential problems with this approach, such as the likelihood of protectionism against an overtly politicized SWF.

But, I have to say, this op-ed by Kavaljit Singh does a better job of laying out all of the potential pitfalls associated with India’s approach. Here are some of the more compelling excerpts:

“The main policy rationale behind setting up a SWF is not to acquire strategic assets and secure supply of natural resources, as proposed by New Delhi. Such funds are established to manage excessive foreign exchange reserves, commodity exports, the proceeds of privatisations and fiscal surpluses.”

“Unlike China and other East Asian countries, which have established such funds on sustained current account surpluses, India has been running persistent current account deficits.”

“Unlike West Asia, India does not have any dominant exportable commodity (such as oil or gas) so as to generate significant surpluses. It continues to be a huge net importer of oil and gas.”

“India also runs a perennial fiscal deficit which means that raising substantial money for sovereign fund from budgetary allocation would be extremely difficult.”

“As far as the proposed fund’s objectives to invest directly in strategic cross-border assets are concerned, the Indian policy-makers need to recognise that the overwhelming majority of sovereign funds are passive investors. In the rare cases where SWFs have made direct investments, they have not sought controlling interests or active roles in the management of invested companies, as private investors do. Even the large-scale direct investments made by SWFs in US and European banks during 2007-08 were minor in terms of bank ownership and did not come with any special rights or board representation.”

“Any direct investment in strategic assets by a sovereign fund will invite severe criticism for its alleged political and non-commercial objectives. Not long ago, the Western world had characterised SWFs as “villains” and introduced new policy measures, popularly known as Santiago Principles, to regulate the investments of SWFs globally. Thus, acquisition of strategic cross-border assets (including natural resources) will not be a cakewalk.”

“Also $10 billion is not enough to acquire strategic assets abroad — unless they become very cheap.”

Kavaljit Singh seems to ‘get it’. Now, will India listen? Or will we witness the first overtly political SWF go in search of strategic resource assets?

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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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