Proposal for $10 Billion Indian Sovereign Wealth Fund Meets Headwind

(July 20, 2011) – Indian plans to create the nation’s first sovereign wealth fund (SWF) out of $10 billion of the country’s foreign exchange reserves have been met with resistance by the Reserve Bank of India, Reuters has reported.

“There is a group which is examining this [proposal for a SWF] but no decision has been taken,” Montek Singh Ahluwalia, deputy chairman of the Planning Commission of the Indian government and a top aide to Prime Minister Manmohan Singh, told Reuters.

The proposed SWF would purchase overseas energy assets to satisfy India’s surging domestic demand. The need for such a fund is acute because China has greatly outpaced India in the acquisition of foreign energy assets. Chinese companies have planned about $46.6 billion of overseas energy acquisitions since January 2010 while Indian companies have only announced $8.3 billion, Bloomberg has reported.

“Rising oil prices are driving the valuation of energy assets and Indian companies can use any help they can get from the government,” Rina Sanghavi, a Kolkata-based research analyst at SPA Securities, said to Bloomberg. “India’s demand is rising and our companies haven’t had a good record competing against the Chinese.”

But India’s central bank is objecting to the proposal, saying that the country cannot afford to finance a SWF out of its foreign exchange reserves because of a current account deficit of 2.6% of GDP. “There is no formal exchange on this,” a Reserve Bank of India senior official told Reuters. “We have to see the proposal. But we have already made our stance clear that we can’t use dollar reserves, which is [sic] borrowed money for setting up a SWF.”

India has $282 billion in foreign currency assets while China has $3.2 trillion.

The debate over whether to establish a SWF in India resembles the ongoing debate in Australia over the wisdom of creating such a fund. While many analysts there have argued that a commodities-based SWF is the best way for the country to profit from a mining boom fueled by rising Asian demand, others have said that a SWF would rob the economy of needed capital and that the country would be better served by a proposed 30% mining tax.