Does India need a Sovereign Wealth Fund? (Part I)

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This is a much debated topic at all levels of government and private bodies. Prior to taking a side, we need to understand what a Sovereign Wealth Fund (SWF) is, its purpose and how it should function to yield the desired result. A SWF is basically a pool of funds created from assets owned by a nation. The assets could be physical commodity(s) or the result of productivity gains of the economy (aka industrial and financial assets). Most commodity based SWFs are created by oil rich nations such as Saudi Arabia, Norway, Kuwait, Qatar, Abu Dhabi etc. Non-commodity based SWFs are based out of Hong Kong, Singapore & China. Basically the SWFs are owned and operated by the government or its agencies.

SWFs - Purpose & Size
The main purpose of a SWF is to ensure that the excess capital generated from a nation's assets are pooled together and invested overseas so as to generate additional income or acquire new assets, which in turn could be used for the nation's future generations & their development needs. Oil being a limited commodity, oil rich nations have moved to secure the sudden rise in cash and look for attractive overseas investments. The oil boom in 1970s and the free flow of capital facilitated after that has allowed several trillions of dollars to be invested across the world. Below is a glimpse of the SWFs and their asset size(s).
  1. Norway $893bn (Oil)
  2. UAE (Abu Dhabi) $773bn (Oil)
  3. Saudi Arabia $757bn (Oil)
  4. China $652bn, $568bn, $200bn (Non-commodity)
  5. Kuwait $548bn (Oil)
  6. HongKong $400bn (Non-commodity)
  7. Singapore $320bn, $117bn (Non-commodity)
  8. Qatar $256bn (Oil)
  9. Canada $207bn, $190bn (Non-commodity)
  10. Others <$100bn
Total assets under management of SWFs as of Sep-2014 is $6.8Trillion with Oil & gas money forming 60% and non-commodity assets forms 40%. Region-wise, Asia has 39% share, Middle east 37% and Europe 17% of all SWF assets. As oil is denominated in US$ (why? Perhaps in another blog), oil-exporting nations accumulate oil dollars and channel them to their SWF. Industrial (China) and financial (HongKong, Singapore) economies run trade surpluses in US$ which they channel into their SWFs. 

You may have taken notice that some of the early & large capitalistic economies such as US, UK, Japan, Germany, France, Italy & Switzerland are clearly missing from the above list - why? Reason is the industrial big houses from these nations are the biggest overseas investors today (McDonalds, GE, Cadbury, Suzuki, Bosch, Alstom, Fiat, Nestle etc)  and hence these countries do not have to exclusively run a SWF to invest abroad. Given this background, let us see if India needs FDI money in the next blog..

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