Saturday, December 29, 2007

SWF II - Answering the Naysayers

Last week, through these posts I suggested how the surplus reserves that India possesses could be harnessed to further strategic and commercial objectives. this week we will have a look at the likely problems that might arise in the establishment of such SWF in our country. The following are the principal issues that we have to address before the establishment of a SWF.

Administration and Management of the Fund
Going by the precedent, each State has an independent fund manager for the SWF that takes decisions based on policies formulated by the Board. In India, we can have an independent vehicle ( Corporation) with the Board taking policy decisions. In my opinion, the Board ought to be as follows:

(a)The Governor of the Reserve Bank or his nominee; will make sure that the invesment is consistent with Forex policies,
(b)the Finance Minister or the Secretary of Finance; to ensure political costs in the event of mismanagement,
(c)Representative of the MEA; to leverage the stretegic potential,

(d)CAG, the Comptroller And the Auditor General; to ensure transparency.

The Current Account Deficit.
This bit is standard. All the States that are investing through the SWFs have a current Account Surplus. We have a Current Account Deficit. So, the argument goes, we do not have the liquidity that other funds enjoy. I agree that this is one of the principal diffrences between us and the rest; and yet this ought not to hinder or freeze our investment options. the solution lies in investing in a relatively diversified portfolio and relatively liquid assets that can be summoned as demand for the dollars increases here. Also, as the Chinese have shown even one-fifth of foreign reserves are enough for the SWF. It is not my case that chunk of the foreign reserves are to be locked-in. this solution clearly implies that the Current Account deficit argument does not pan out.

Corporate Governance
hmm, this seems to be the buzzword these days. And much of the issues sorrounding SWFs stems from the fact that barring Norway, none of the funds have had transparency in its operations. However Capital in the hands of Government that are Democratically chosen have inherent " checks and balances". the Board Composition that I suggested above has the Comptroller as a watchdog and the Finance minister as its members; that would ensure a Parliamentary check on the Fund. As I pointed out above, this Composition would ensure that there are political costs of mis management and the knowledge thereof would make the Fund transparent ex ante. we may follow the Norwegian lead in this regard.
As we usher in the New Year and celebrate India cutting the Cake for Tata Motors acquring Jaguar-Rover, A New Year resolution of SWF by the North Block may just be the icing!

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