The last piece i spoke about how we must raise a toast to socialists and bearish Regulators for insulating us from the Sub Prime crisis. This piece i speak of a related dvelopment and another one that regulators in India mght have to mull about- that of using the huge forex reserves that India is currently sitting on and the best way to utlise them.
From a country that had balance of payment issues in the 1990s, we have indeed come a long way in terms of forex reserves! in fact we have reached the other extreme end of the continuum and the bank regulator is tryin to suck up the excess dollars in the system by such measures as market stabilisation bonds. but we have not seriously at any rate, tried to reap out of the surplus reserves that we possess.
In other words, does India need a Sovereign Wealth Fund( SWF)?In my opinion seems a very lucrative and strategic solution to the surplus reserves problem.
The gulf nations sitting on their " Oil Dollars"have shown how to use an invesment vehicle strategically as well. it may be noted that CITI was bailed out by the Abu Dhabi fund and chances are that the Gulf states would make more hay in the recession hit US market. the Chinese with their Chinese Investment Corporation that has a 30% stake in Blackstone would also try and place themselves as investors in strategic areas of key competing states- as we speak Temasek- the Singapore Government fund is in talks with Merill Lynch for fund injection in the latter. and it already has stakes in Barclays and StanChart. The Fund has invesments in everything to biotechnology to port operations- port operations! there you have a whiff of huge strategic potential of the SWFs!
The macro? more and more government are using reserves to build up strategic positions in key areas of other states. And i suspect it is time for India to follow suit. The Surplus reserve Problem would be solved and Economics of the SWF will inform Politics going by the aforementioned data.
That is not to say we want to have an absolute " Laissez Faire"; obviously the hunters all stand the risk of becoming the hunted in the current scanario. So, India stands the risk of " exposing" its key sectors to Foreign governments. there are transparency issues as well. Apart from the Norwegian SWF, the most transparent of SWFs, ( it debarred "Vedanta Technologies" from being part of it because of the latter's shady Environmental rights record), no one knows where the money in the SWFs of States is coming from.
So, obviously some key issues have to be regulated. A best Practises code needs to be hammered out - by a " basel-like" system. Certain sectors, key to each state would have to be protected and multilateral reciprocal arrangements would have to be put in to place to keep those areas "beyond bounds", but i suspect, as the old brokers say, 'Capital would find its way!'
Are the Mint Street and the North Block listenin?