SWFs mark a seminal development in 21st century international finance and can play a pivotal role. Many capital exporting countries, including the US, are looking to establish SWFs and more systematic ways of enhancing returns on a long-term basis. In fact, there is rare bipartisan unanimity on using an SWF as an economic tool in the US.
It isn’t the first time that this idea has been broached in India. Decibel levels on an SWF rose in policy circles during a phase in 2007-08, when our capital inflows exceeded $108 billion in a single year but waned after the Global Financial Crisis.
It gained momentum again in 2010-11, when the Planning Commission revived the idea of setting up a $10 billion non-commodity SWF that it said could draw upon a part of the country’s ‘surplus’ foreign exchange reserves (about $300 billion then). The commission suggested that it could also be funded by cash-rich public sector undertakings or through budgetary allocations.
The idea has waxed and waned thereafter. The typical pushback has been that SWFs are for countries that have mineral wealth or run trade and budget surpluses.
But India runs persistent current account deficits and a sizeable fiscal deficit. Another argument against it has been that India’s domestic markets are deep, so we do not need an SWF. There have also been other concerns related to its governance, structure, investment goals and policies.
Note, India has had structures similar to an SWF wherein the government has taken corporate India and financial institutions along in the creation of a pure-play investment vehicle, such as the National Investment and Infrastructure Fund, a government-backed fund set up in 2015.
As for the question of an SWF, a lot of water has flown since the 2000s and the global as well as domestic backdrops have changed significantly. The world is grappling with the mega-trends of decarbonization, de-globalization and demographic changes.
India’s own aspirations, needs and concerns have transformed. It is now a far bigger economy and a vital global player. India must nurture a large population, veer to a greener growth path, secure its supply chains and find avenues to generate employment at scale—aimed at lifting and broadening its wealth pyramid.
Importantly, it is not pragmatic to take a narrow view of an SWF by seeing it strictly in terms of the financial value, currency diversification and market returns it could generate via investments in equity, infrastructure, foreign currency and other assets.
There is a growing need to view its role in a much broader light.
First, an Indian SWF can play a key role in maximizing social, political, commercial and economic benefits, and not just financial returns.
Second, an SWF can be used to make direct investments in entities with specialized knowledge, specific resources, and critical technologies to bring them to India. It can invest in ‘disruptive’ fields such as quantum computing, GenAI, telecom, space-tech and green-tech, among others.
America’s Joe Biden administration has spent months on designing a fund that would provide capital to advance US strategic interests like early-stage technologies.
Third, such a fund can be used to increase India’s global heft and help the country achieve deeper economic integration. It can create and leverage opportunities to develop specific infrastructure projects that are of mutual interest to India and other countries, such as the India-Middle East-Europe Economic Corridor, and invest in other vital projects overseas as part of India’s ‘look-east’ policy.
Fourth, it can specifically help address the issues of resource dependence and diversification of economic risk. The weaponization of critical mineral supplies, especially by China, is a major concern.
Current Chinese dominance over a large number of product categories creates a risk of economic coercion and its monopolistic practices considerably limit the space for new entrants to emerge as manufacturing powerhouses.
This can hurt green transition efforts. Resource-rich nations are also toying with the idea of a ‘buyers club’ to avoid a bidding war among G7 countries or strategic stockpiling by others. The US and EU are promoting localization and friend-shoring, even as they make moves to secure critical minerals and technology.
Lastly, an SWF can and should have a complementary relationship with the Reserve Bank of India, with a distinct mandate that attaches relative weights to liquidity, security and returns that differ from those of the central bank.
In a nutshell, there is more to the SWF debate than just spouting words on foreign exchange reserves and the Greenspan-Guiddotti rule. India’s approach to an SWF needs to be guided not by where the country currently is, but where it aspires to be in the years and decades to come.
These are the author’s personal views.
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