Sovereign Wealth Fund

Heard of Temasek Holdings and GIC recently? If not, they were in news because of attempt to acquire 10% stake each in ICICI bank. Temasek Holdings and GIC are investment funds that are not owned by any private enterprise. Rather it belongs to Government of Singapore. These are what, today, we know as sovereign funds. Following is an attempt to simplify the meaning of the term and later on discuss why India, again, have not yet boarded the bus of Sovereign Wealth Fund.

SWF is an investment fund owned and controlled by the government in order to better utilize its budget and trade surplus for the benefit of the economy and its citizen. The funding can come from any of the following –

1. Foreign currency reserves
2. Budget surplus
3. Accumulated funds in the course of fiscal management
4. Revenue generated from the export of natural resources.

(The above list is only illustrative and not exhaustive)

Thus SWF is a source of tapping the surplus savings of developing countries. When countries accumulate more reserves than it feels it needs, Govt. creates SWF to manage these ‘extra’ reserves.

Purpose of creating such a fund

Government uses SWF for following purposes –

1. Stabilize revenues from commodity exports – The SWF is generally created by the governments whose revenue depends on sale of one commodity. Then this investment fund is seen as the means of diversifying the revenue streams.
2. Invest foreign exchange reserves – Surplus foreign exchange reserves can be invested in the income producing assets rather than allowing them to remain idle as non income generating assets.
3. Savings for future generations – SWFs permit nations with abnormally high income in a particular year to save for the future. People will prefer smooth level on consumption rather than starving one year and gorging the next. Thus the fund allows the government to save high current income for future spending when the income may be lower.

SWFs investment is not restricted to risk free securities. These funds have the capacity to undertake risk and looks for higher returns. Their investment portfolio may include shares, commodity, land, etc.



Sovereign funds have existed since 1950s, but the total assets under management have increased in the last 10-15 years. Till June 2008, the total asset under management of the SWFs is around $4 trillion. Currently more than 20 countries have these funds, India (as expected) is not one of them. Some prominent examples of SWFs are Norway’s Government Pension Fund, Abu Dhabi investment authorities, Tamesak holdings, China Investment Corporations and the list continues.



Indian Perspective

With around $ 306 billion in its foreign kitty, India is sitting on piles of free reserves which it currently invests in the risk free US government treasury bills or bank deposit @ 5%, when other countries, with the help of SWFs, are making 16% - 18% on the same. Thus creation of SWFs to manage this reserve and yield higher return is highly warranted. Still India is now one of the few countries with large foreign asset holdings that have not created a sovereign wealth fund ("SWF") to enhance its investments.(See Note)

However, creation of SWF in India faces a number of issues to be dealt with.
The nature of fund with India is different from that of other sovereign fund countries. Foreign portfolio flows into the stock markets, external commercial borrowings and short term borrowings are the single largest component of capital inflows. These are all capital flows whereas China’s or Singapore’s reserves are created out of their trade surpluses and on current account. Thus while deploying the foreign exchange reserves; it is important to keep in mind that all these capital inflows are not of stable nature. Thus committing the resources into avenues of long term nature will pose problems. Further, SWF should be well and independently managed. Unless it is done so, there would be complaints of nepotism, corruption, not to speak of underperformance. Given the governance in India and the amount of sum involved it is expected that SWF will be subject to corruption and mismanagement and could be misused to promote domestic political or foreign policy objectives.

Therefore the luggage of problems that India has is too heavy to carry and board the ‘bus’ of SWF.

Note - SWF means investment made out of funds which are disclosed to be surplus reserves with the government, with the intention (at least on paper) of utilizing the gains for public welfare. In many countries investments are made out of these surplus reserves by the politicians, but they are not disclosed to have been made out of these reserves. Any investment made in the market by a politician, even though out of these surplus reserves, in order to earn income without having to invest any money cannot be termed as SWF. Therefore India still does not have a SWF.
- Ashish Gupta