India scraps Sovereign Wealth Fund

India has dumped the Sovereign Wealth Fund proposal, describing the whole idea as stupid.

News reports said the Prime Minister’s Office (PMO) dumped the idea to create a Sovereign Wealth Fund (SWF)of $20billion following overall assessment that India does not have sufficient foreign exchange to support it.

According to Financialexpress.com, the most vocal resistance came from the Finance Ministry, with both the economic affairs and expenditure departments saying cash-rich public sector undertakings(PSUs) should use their reserves and decide independently on commercial terms.

“In the prevailing situation… it would be more advisable if PSUs with surplus funds and technical know-how take independent decisions to invest in acquiring assets based on commercial gains,” said the economic affairs department at a meeting held by the principal secretary to the PM.

“The expenditure department’s view was that “current reserve position of the government does not allow a SWF. PSUs with strong intrinsic financial strength… should come forward to acquire assets on their own”, reported Financial Express.

Last July, the Prime Ministers Office had directed the economic affairs department to submit a concept paper on a $20-billion SWF.

R. Jagannathan, commenting on the scrapping of the proposal said: “An idea born more out of hubris than good sense is bound to die an unsung death. And so it is with the much-touted India sovereign wealth fund (SWF)…Sovereign wealth funds are usually created out of huge current account surpluses – where a country has more dollars that it can spend by exporting more than importing over a sustained period of time. This is why China has several sovereign wealth funds. Norway, which obtained a bonanza from the discovery of North Sea oil, created a fund to invest this unexpected wealth for meeting the needs of future generations.

“Now consider India’s case. This year we will run a current account deficit (CAD) of nearly 5 percent of GDP – even worse than in 1991. To meet our consumption expenses, we are borrowing hand over fist from the rest of the world by opening up our debt markets to foreign institutional investors (FIIs), making it lucrative for non-residents to invest in bank deposits, and allowing Indian companies to take on more foreign debt through external commercial borrowings”.

Nigeria last year created the SWF, with an initial $1billion fund, against the opposition of state governors.