Indian SWF Debate Resurrected

Ashby Monk 

With roughly $300 billion in foreign reserves – the seventh largest pool of foreign reserves in the world – the debate over whether India needs a sovereign wealth fund is an important one. Last time we checked in on the topic, it seemed the proposal had been killed. But, once again, the idea of an Indian SWF is back, and the Chief Economic Advisor to India’s Ministry of Finance, Dr. Kaushik Basu, appears to be responsible for resurrecting the idea. Basu said at a conference this week that the country should join the other BRIC members and think hard about setting up a new sovereign wealth fund.

Interestingly, Basu also released a survey of India’s business leaders (see the Economic Times report) that showed they favored setting up a SWF. The consensus was that such a fund should be roughly $50 billion in size and should be used to acquire assets vital for India’s long-term grown (i.e., energy and resources). Indeed, Basu apparently said that the objectives of such a fund would be twofold: It would seek to be financially viable as well as further India’s role and status as a global player. Now, I don’t want to spend too much time on this, as we may learn next week that the idea of an Indian SWF is, once again, dead. But I do have a few brief thoughts.

It’s a bit provocative to talk, as Basu is doing, about an overtly strategic SWF (i.e., one that invests as much for national returns as it does for SWF returns). But, it should be noted, the Indian SWF would not be alone in this regard. For example, the CIC is routinely raised as a fund that behaves strategically, even if it swears publicly that all of its investments are completely commercial. And other funds are more forthcoming. In fact, an interesting model for the mooted Indian SWF may be the Korea Investment Corporation. The KIC is universally regarded as a well-run financial institution. And yet, it has the dual objectives to generate financial returns and fill some structural deficits in the broader Korean economy. As the KIC’s Scott Kalb recently noted,

“We’re interested in sectors where there is a structural deficit in the Korean economy, so we can make a return while also helping to address that structural deficit. We’re also interested in industries where Korea may have a competitive edge, providing synergy for Korean companies as they continue to expand overseas.”

Kalb has also said,

“KIC is planning strategic investments based on a so-called barbel approach, investing in areas where there’s a ‘structural deficit’ in Korea’s economy such as natural resources, as well as industries that may have synergies in areas such as clean technology.”

In a sense, the KIC is a multi-mission SWF, albeit with a primary focus to generate financial returns. So long as the Korean fund never compromises on financial returns, it is legitimate (at least domestically) for the fund to pursue some secondary objectives. That seems a sensible model for the Indians to follow.

In terms of securing international legitimacy for a multi-mission SWF, the Santiago Principles offers clear guidance. GAPP 19.1 sub-principle states,

“If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.”

So there you have it. If you’re going to do it, you just have to tell people what you’re doing. Thankfully it seems the Indians don’t have a problem doing just that.

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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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