India is all set to join an elite club of 30 nations that have sovereign wealth funds (SWF) by dipping into an estimated surplus of Rs. 2,50,000 crore with cash-rich public sector companies in addition to using a small chunk of foreign exchange reserves.
With only two months to go for the UPA government’s last budget before the next general election, details of the fund are still being stitched up. One option being considered is to create special instruments that public sector companies can invest in and use the funds raised from them to shop overseas.
Government documents available with HT said the funds are expected to be used to secure the economy’s long-term interests by buying up assets to ensure supply of critical energy and fertilisers for India.
Governments use SWFs to secure their economies and smartly balance their growth and macroeconomic objectives. Trillions of dollars are parked worldwide by SWFs.
After a series of meetings with the PMO, the finance ministry recently sent a letter to the economic ministries concerned, including petroleum, power and fertilisers, on “mobilising resources from within, including the public sector undertakings”.
“The Department of Economic Affairs feels it may be prudent to rework the concept with greater focus on mobilising resources from within, including the public sector undertakings, by creating an attractive instrument of investment,” said the finance ministry’s letter to the economic ministries, a copy of which is available with HT.
“We want to look into setting up a fund which would be India-specific (in the formation of the corpus)," a senior finance ministry official said, adding that initial consultations have already been held on the modalities of this fund.
The capital markets division under the finance ministry is looking into developing special investment instruments through which the public sector undertakings can direct their cash surpluses into the SWF.
Central government-run companies contribute over 6% of the country’s GDP and their profits are at a record level of Rs. 1,00,000 crore. PSUs such as Coal India had cash balance of R58,202 crore in 2011-12, NMDC Rs. 20,264 crore, NTPC Rs. 16,146 crore and SAIL Rs. 6,415 crore.
Typically, SWFs are considered part of any country's foreign exchange reserves and are used to invest into global equity, infrastructure, commodities and other financial instruments.
Though the setting up of an SWF has been under consideration since 2008 in India, the proposal could not move forward due to the nation’s high fiscal and current account deficits.
Around 30 countries, including China, Singapore, the UAE, Malaysia and Qatar, operate SWFs. A number of current account surplus countries have set up SWFs from their foreign exchange reserves to acquire assets overseas.
Though the planning commission favoured creation of a dollar-denominated sovereign wealth fund for India, the Prime Minister’s economic advisory council, headed by C Rangarajan, has been opposed to digging into the forex reserves, a finance ministry source said.
The source said a dollar-denominated fund could add to India's fiscal pressure at a time when volatility in global oil prices is high and this was not desirable.
Earlier, the Reserve Bank of India was also not comfortable with the idea of directing a part of the foreign exchange reserves into the SWF.