I have been reading quite a bit about sovereign wealth fund recently. I found that startling amounts of money is being poured into such funds by the governments that own them. For laymen, a sovereign wealth fund is an entity that is funded by the forex reserves of a nation and is directly managed by government appointed fund managers who are entrusted with the task of investing the money on behalf of the government to generate above normal returns. The investment is usually made in global companies in the private sector in the form of debt or equity. In the recent times, a spate of new SWFs (as they are known) owned by governments in Asia have sprung out with ludicrous amounts of money. Some of the owners include Temasek Private Equity and GIC owned by the Gov. of Singapore, Abu Dhabi Investment Authority owned by the Abu Dhabi sulatanate and CIC owned by the Gov. of China. These funds have been equipped with enormous amounts of money, in the range of $100-$200 billion each and have been in the news recently due to their invetsments in beleagured American banks desperately looking for cash to avoid shutting shop. A lot of this money has been lost by the funds as their cash could make little difference to save the misery of these banks. While this is definitely of concern given the amount of forex lost, it is also a weapon of strategic dominance in economic realm. Somehow, it seems that the money these funds have is spent on investment in strategically important companies, such as financial services behemoths, natural resources companies such as oil and gas producers. There have been questions in the US Senate about the growing dominance of SWFs as the US gov suspects ulterior motives of other governments than just pure risk-return play.
It is interesting that while some SWFs such as GIC or Temasek are actually pure risk-return plays, others such as CIC owned by China seem more politically motivated as a means of driving the Chinese agenda of world dominance. While China is developing at breakneck speed, it is still not a developed nation and the government stills has to do much more and spend much more to put China in the league of developed nations. So it's a little fishy out there!
Coming to the question of why India should or should not have it's own SWF given the growing pile of forex reserves, it is easy to answer the question in not just one, but many ways. First, India is far behind China in development and there is a crying need for government investment in providing basic amenities and infrastructure for the whole country. According to recent estimates, India needs an investment of around $350 billion in the next 5 years if it aims to sustain it second fastest growing economy status in the world. Second, the rampant corruption in India and the bureaucracy that is deeply entangled will prove a huge deterrent in meaningful deployment of funds that are entrusted with the managers. Also, the political climate of the country does not seem conducive as it is easy to see that even the fund managers will fall prey to political manouvering and nepotism that hasn't spared even the best run PSUs. Third, it is not the government's business to be in business.
It is interesting that while some SWFs such as GIC or Temasek are actually pure risk-return plays, others such as CIC owned by China seem more politically motivated as a means of driving the Chinese agenda of world dominance. While China is developing at breakneck speed, it is still not a developed nation and the government stills has to do much more and spend much more to put China in the league of developed nations. So it's a little fishy out there!
Coming to the question of why India should or should not have it's own SWF given the growing pile of forex reserves, it is easy to answer the question in not just one, but many ways. First, India is far behind China in development and there is a crying need for government investment in providing basic amenities and infrastructure for the whole country. According to recent estimates, India needs an investment of around $350 billion in the next 5 years if it aims to sustain it second fastest growing economy status in the world. Second, the rampant corruption in India and the bureaucracy that is deeply entangled will prove a huge deterrent in meaningful deployment of funds that are entrusted with the managers. Also, the political climate of the country does not seem conducive as it is easy to see that even the fund managers will fall prey to political manouvering and nepotism that hasn't spared even the best run PSUs. Third, it is not the government's business to be in business.
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