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A fund to trigger a USD 10 trillion economy

India is perennially doing a tightrope walk to maintain the fiscal deficit but we have not thought of long-term provisioning for the country’s needs.

Published: 24th January 2021 05:00 AM  |   Last Updated: 24th January 2021 11:21 AM   |  A+A-

With each year passing, our asking rate of GDP growth per capita is increasing, slowly sliding the country into a potential long-term crisis and a possible downgrade.

With each year passing, our asking rate of GDP growth per capita is increasing, slowly sliding the country into a potential long-term crisis and a possible downgrade.

India has resources that have been latent for a long time. We need to draw out a strategy to leverage these resources and grow them to meet our ever-increasing needs.

India is perennially doing a tightrope walk to maintain the fiscal deficit but we have not thought of long-term provisioning for the country’s needs.

With each year passing, our asking rate of GDP growth per capita is increasing, slowly sliding the country into a potential long-term crisis and a possible downgrade.

One path-breaking idea for this year’s budget could be to set up the Sovereign Wealth Fund (SWF), unique from any other SWFs in the world.

This SWF should catalyse India’s growth, become the new nucleus of its growth story, and secure its future generations in meeting spending needs for development. 

Sixty-five countries have already established at least one SWF. More so, SWFs in the developing economies have a pivotal role in the country’s financial architecture. The assets under the SWFs increased from $3 trillion in 2008 to $10.6 trillion by 2014, and was expected to touch $15 trillion by 2020.

This trend is likely to increase. If we look at Norway, its GDP is just $414 billion, but its assets under the management (AUM) of the SWF is three times the size of its GDP at approximately $1.2 trillion.

Similarly, if we add all the SWFs of China, the total AUM of the SWFs is $2.2 trillion (including the Hong Kong SAR). Similarly, Abu Dhabi has an AUM of $579.62 billion while its GDP is $354 billion, and the same is the case of most of the countries where the AUM of the SWFs exceed the GDP of their nation. 

There is a wonderful opportunity for India setting up its SWF. In 2015, India set up the National Investment and Infrastructure Fund with an investment of Rs 20,000 crore for co-investing in domestic infrastructure projects. In my view, this was too late, too little, and is just an infrastructure investment fund and not what India could have leveraged from a SWF.

The Bharat Sovereign Wealth & Development Fund should have precise functions; one is to manage the money/wealth and grow it, and the second is to be an active investor. The structure should be vertical-based. On the wealth and money manager role, it should manage the performing and non-performing assets both and grow them, and on the investor side, it must invest in existing and emerging sectors. 

India can transfer the government’s land bank into this SWF along with its holding in PSUs, portion of RBI profits and Forex reserves and Employees Provident Fund, and offset clause deals could be parked into this SWF. India should contribute 1 percent of the tax receipts to SWF.

Also, SWF can set up co-investing deals with other funds, family offices and institutions. SWF can leapfrog India’s economy with a quantum jump, and that too, with multi-dimensional impact. If the idea is executed well, India’s SWF may be around $3-5 trillion to start with, and it can become $10 trillion in the next decade.

The SWF can strategise the sectors and countries where it needs to invest and create holdings in key economies of the world and critical sectors. When the SWF invests in companies across the world, it can push the organisations where it invests to start operations or offices in India, thereby creating local jobs.

If India had a SWF, it would have invested in vaccine research across the globe, catapulting the country into a world leader for Covid vaccine. SWF can secure future generations and help make provision for India’s needs for social security for its aging population and other development needs.

Once this SWF grows, it can help balance short-term fiscal positions for the government, insulate the budget and economy against volatility (generally commodity price fluctuations), serve as an additional policy tool for meeting government payment and foreign exchange, besides creating long-term assets with social impact.

Also, it can balance private sector anti-competitive practices and monopolies. SWF can provide the risk and growth capital, and support India in creating $3-5 trillion Indian corporations by 2035. The vision should be long-term investments in early and growth-stage companies and sectors.

SWF can invest in companies that have a scope for listing, and may deliver the highest return on their listing. On the verticals, it could address the existing and new or emerging sectors.

The sectoral and vertical focus could help cross-subsidise. It is important for the SWF to be insulated from political interference, bureaucratic controls and judicial interventions.  India’s SWF should look at a minimum annual return of more than 10 percent.

The country, from being just among the top investment destinations for SWFs, should have its SWF to invest in the top investment destinations. SWF could turbo-charge India’s growth story and this year’s budget should consider this idea.

Prof Rajendra Pratap Gupta Twitter: @rajendragupta
Public policy expert

 



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