YV Reddy doesn?t change his mind too often?as we know, having argued against his stand on interest rates for months now. Therefore, it is of particular interest that Reddy, speaking in Washington recently, appeared to change his mind on the issue of whether India should float a sovereign wealth fund (SWF). RBI?s website hosts lectures by the governor that present long arguments against the idea of an Indian SWF. Reddy still retains the technical caveats?that India?s current account is in deficit, that it doesn?t have a hard currency flow that comes from high value commodity exports?but he has now in principle blessed an SWF, making the familiar argument that foreign currency reserves should earn more for the country. How much this will influence the government?s position is unclear. More so since the UPA is in the endgame of its term and there isn?t much reason politically to court the bother that comes from a high-profile decision like setting up an SWF. And even more so since the PMO, only a few weeks ago, asked the finance ministry to take a close look at the operations of global SWFs operating in India. Plus, remember, Reddy is on his way out.
The SWF idea, however, is here to stay. And, therefore, it is good to point out an aspect of the fund that SWF-enthusiasts usually miss. The idea that state-backed money should buy private assets?equity in listed private companies, for example?should bother any economic liberal who in principle favours private ownership. That foreign governments own these funds is a second-order point. The fact of state ownership is the first principle discomfort. As for foreign ownership, the fact that India, unlike China or Russia or Abu Dhabi, is a liberal democracy may make an Indian SWF less discomfiting. But here, too, some questions arise?about whether any government can be trusted to be only interested in making money. Greater disclosure norms?most SWFs? investment intentions are as clear as mud right now?that the IMF is working on at the moment may help. But India should know even SWFs of liberal democracies can get into hot water. Norway?s SWF, one of the most transparent, angered Icelanders some years ago when it took a profit-making decision on Iceland government bonds. Democratic governments and money-making never mix well.