FE Editorial A sovereign question

The Financial Express
Posted: 2008-08-18 23:16:10+05:30 IST
Updated: Aug 18, 2008 at 2316 hrs IST

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: The issues surrounding the role of sovereign wealth funds (SWFs) in the Indian economy have been resurrected by the high-level coordination committee on financial markets. The committee has recommended that RBI and Sebi will now collect and analyse data on sovereign wealth fund investment through both the FDI and FII route. The data will then be shared with the government. This seems to be a well-thought decision, which will be a first step before finally deciding on the exact policy framework which will govern SWFs. These government-owned financial entities are worth an estimated $8 trillion, putting them on par with some of the biggest pension funds in the world, not to mention being on par with the reserves of the world’s biggest central banks. The wealth of these funds, and their role in the global economy, will only increase in the next few years with some estimates valuing them at $20 trillion within the next five years.

The main problem with SWFs is that they are public sector entities owned by governments with massive current account surpluses, mostly because of a natural resource boom—Norway has one, so do Dubai and Abu Dhabi. Singapore has a big one which is one of the few not being funded by oil wealth. These entities do not have to follow the rules of the game that private sector entities do—they are usually much less transparent in their functioning and their motives may easily move beyond sound investment profit. Yet, they are legitimate participants in the world of global finance. Ironically enough, they have found a space for themselves because of the abject failure of private banks and financial institutions which began to stutter after the subprime crisis. It makes little sense to shut them out. And the government of India must not do so. But there is enough ground to study them carefully, which justifies the decision of the high-level coordination committee. There may even be some ground for a framework of regulation. In the longer term, though, it would be best if SWFs regulate themselves by becoming more transparent about their functioning. They must be able to convince market participants that they are willing to play by the same rules as everyone else. Whichever way, SWFs are a reality which cannot be wished away by any country, including India.