New Delhi: Four months after it set out to find whether foreign sovereign wealth funds (SWFs) pose a threat to India’s interests, the country’s finance ministry has decided that they don’t and, consequently, that there is no need to restrict their investments here.
“It might be premature to set boundaries for their (SWFs) investment opportunities,” said a senior finance ministry official, on condition of anonymity.
A ministry team found no evidence of an SWF acquiring significant direct stake in important assets such as ports or airports run by private operators in the country, the official said.
“I don’t think it is the best time to be selective about investment flows. We might just get left out,” said Abheek Barua, chief economist at private sector lender HDFC Bank Ltd.
The team — it studied SWFs under directions from the top tier of the Indian government, including the Prime Minister’s Office — has also said there is no need for India to float its own SWF.
SWFs are special purpose investment vehicles created by governments with surplus foreign exchange to invest overseas. Over the last year, there has been growing global concern that SWFs are more focused on national interests than other investors, who are usually focused almost exclusively on profits.
“We don’t want anecdotes; we don’t want impressionistic views. We want data,” a 10 March Mint report had quoted a government official as saying. The article said that a finance ministry team has been asked to come up with a working definition for SWFs, whether they posed a threat to India and whether India needed to create its own fund.
Agreeing with the study that ruled out forming an Indian SWF, Barua said, “There’s a constant charge on our reserves, (and) some part of capital flows have to service current account (deficit).”
“A significant portion of India’s foreign exchange reserves is made of foreign investment, which can be withdrawn any time. Consequently, India’s foreign exchange reserves can be more volatile than a country with an SWF such as China where trade surplus (when exports exceed imports) is an important contributor to foreign exchange reserves,” said another economist with a bank, who did not wish to be identified.
In October, Reserve Bank of India governor Y.V. Reddy had flagged India’s position on rising global concern about SWFs during a speech in Mumbai.
“India has a stake in the on-going debate by virtue of its increasing importance in global capital flows. The critical issue relates to standards of governance and transparency that are adopted by such funds and the extent of comfort that investee countries have in this regard,” Reddy had then said.
SWFs have existed for about 50 years, but it is their recent growth in size that has triggered concerns. According to the International Monetary Fund, SWFs’ sizes are likely to grow threefold over the next five years to $6-10 trillion (Rs256-427 trillion).
The growth in SWFs is being driven by foreign exchange surpluses generated by some countries on account of historic highs in oil prices and trade surpluses. Countries such as the United Arab Emirates, Norway, Saudi Arabia, China, Kuwait, Russia, and Singapore control the world’s largest SWFs.
These funds not only invest directly on their own, but also route investments through other investors.
For instance, China’s SWF — China Investment Corp. —has stakes in private equity investor Blackstone Group Lp. and financial services firm Morgan Stanley, which in turn invest in other firms.