Indian businessmen often complain that they lose out to Chinese companies that have the weight of Beijing behind them. Now, the Indian government seems ready to throw its weight behind Indian firms.
At a Mint post-Budget conference in Mumbai on Friday, finance secretary Ashok Chawla said: “The government is engaged in preparing a policy for the manufacturing sector that will focus on acquiring raw material (assets) abroad.” Last week in Parliament, Union petroleum minister Murli Deora described how such assets could be acquired: The government is considering “the creation of a sovereign fund”. This will help some local businesses, but will it help India’s broader market?
First, the very vehicle for such acquisitions is problematic. The likes of China direct their own sovereign wealth fund (SWF) to use the central bank’s foreign exchange reserves to buy equity in, say, a Saudi oil field—the return on that equity defraying higher oil prices. But India can’t spare that kind of cash: Its reserves, currently around $278 billion, are more urgently needed to manage, for instance, capital inflows. And since India, unlike China, runs chronic trade deficits, these reserves won’t reach China’s $2 trillion anytime soon.
Second, one country’s government controlling investment in another country’s natural resources always raises questions. China has attracted enormous controversy, forcing many in the West to ask whether its SWF purchases are part of a “national” strategy.
India has avoided controversy precisely because our private sector has been heavily involved: This weekend, Essar announced the $600 million purchase of a US coal producer. Even the government firms involved, such as Oil and Natural Gas Corp. Ltd, are publicly listed and, hence, fairly transparent. This has not just smoothened Indian acquisitions, but also generated goodwill in foreign policymaking. The loss of all this, though sometimes intangible, can’t be compared with whatever gains an SWF can provide.
Still, we won’t pretend there aren’t national interests at stake—pressure arising from the “new mercantilism”, a race where India tries to buy assets abroad faster than another country can, or faster than others buy assets in India. Securing energy supplies, where India repeatedly loses out to China, is particularly strategic.
So if not an SWF, the government should think of alternatives—perhaps organizing a firm along the lines of the India Infrastructure Finance Co. Ltd to help finance energy deals— while ensuring that the benefits are there for all in the marketplace to share. For the longer term, policymakers must allow domestic industry to prosper with a better tax regime, land acquisition laws and financial sector—a point where India’s private sector doesn’t even need the government’s weight behind it.
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