Does it make sense for India to launch a sovereign fund? No. It’s not the government’s business to be in business. A government should focus on areas that are crucially important, but perhaps not attractive enough for private investors, or too sensitive to be privatised. Areas such as elementary education, rural healthcare, infrastructure, national security, and law and order. So, why are other governments in the investment business? The reasons are varied. Take, for example, China, whose big-bang entry into the wealth fund industry last year with a fund of $200 billion may have got the mandarins in New Delhi clamouring for a me-too fund. In China, the government is the business still, besides which it has vastly greater reserves and a current account surplus. Singapore and Kuwait (and perhaps Korea), because they are tiny countries, have no choice but to look outside to grow their economic clout. More importantly, and which should be the single-biggest reason why India must look for other uses of its foreign exchange reserves, those nations already have well-developed infrastructure, whereas India has yet to build its roads, ports, and power plants. Part of the country’s forex reserves can be leveraged, via public-private partnerships, to cater to the more urgent need for better infrastructure and social development. Ensuring India’s energy security by buying ownership in coal and oil & gas companies abroad is a noble thought. But perhaps the relevant public sector units should make those decisions as part of their normal business planning. After all, what such acquisitions will ensure is only supply and not the price; no foreign oil or coal company, partly or fully-owned by GoI, would be foolish enough to sell its product below market prices.
Besides, any sovereign fund will be seen with suspicion by recipient countries. At any rate, between owning strategic assets abroad and building India’s infrastructure and social capital, the latter is a better idea.
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