By Jayachandran/Mint

By Jayachandran/Mint

Ourview | A dubious investment

Ourview | A dubious investment

Recent reports suggest the Union government has given an “in-principle" approval for creating a sovereign wealth fund (SWF) to buy natural resources such as coal, oil and gas, and other minerals. It has been suggested that an initial amount of $10 billion be devoted to get the fund going. For further requirements, the government could either tap into the country’s $350 billion pile of foreign exchange reserves and/or rely on budgetary allocations.

By Jayachandran/Mint

It is equally unfeasible to turn to the budget to fund an SWF. In 2011-12, India’s fiscal deficit has been targeted at 4.6% of GDP, a figure that looks increasingly shaky. It is not clear what budgetary resources can be spared unless, of course, the government raises taxes, and even that may not be enough.

That is not all. Most of the available, uncommitted natural resources exist in politically-volatile countries in Africa and elsewhere. In “normally" functioning spot markets for these resources, an SWF does not pose immediate risks. These are, however, exhaustible natural resources whose value will go up disproportionately as their availability and reserves decline. When coupled with the high political risks in these countries, the danger that investments made by India’s SWF can sink is very real. To keep its investments safe, India will have to craft a politico-military strategy along with an investment strategy as well. If China is able to do that, it is probably in part due to its having thought these issues through. Realistically, India is not capable of doing that.

Finally, the size of India’s fund can only evoke amusement. It is an open question as to what $10 billion can buy in this market. When China set up a similar fund in 2007— the China Investment Corporation—its initial fund size was $200 billion. India does not have deep pockets required to buy such assets. It needs to rethink the very idea of an SWF, if not abandon it altogether.

Can India afford an SWF? Tell us at views@livemint.com

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