Deepak Shenoy, founder of Capitalmind, on the other hand, opposes the idea.
He argues that mutual funds already have the capacity to invest abroad and warns that the creation of a sovereign wealth fund could exacerbate the fiscal deficit.
The Union government has initiated preliminary talks with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) on revising regulations to facilitate the creation of a sovereign wealth fund.
Sources say a $5 billion fund could potentially generate $10 billion worth of investment opportunities annually.
Excerpts from CNBC-TV18 interviews
Q: Are you in favour of creating a sovereign wealth fund for India? What benefits could it bring?
Shah: Of course. The time has come for India to set up a sovereign wealth fund, but it must be done in a measured and cautious manner. Despite our current account deficit, we can proceed with caution. There are numerous successful sovereign wealth funds around the world, such as GIC Temasek in the Far East, ADIA and ADIC in the Middle East, and Norges in Scandinavia. These examples offer valuable lessons. Some of these institutions even employ people of Indian origin, so we can learn from global best practices. It is essential to build on the successful management of our existing funds and proceed with caution.
Q: What is your perspective on the idea of a sovereign wealth fund?
Shenoy: I have reservations about this proposal. The government should refrain from setting up a sovereign wealth fund. India already has mechanisms to invest abroad through mutual funds, which are governed by the Reserve Bank of India’s limits. Introducing a sovereign wealth fund could increase the fiscal deficit due to borrowing. Currently, our interest payments are over Rs 7 trillion annually, almost double our defence spending.
Moreover, a sovereign wealth fund would likely involve borrowing to invest abroad, which could affect our fiscal position. It would be more prudent to allow mutual funds to invest internationally within a controlled framework. Our current capital account convertibility is restricted, and a sovereign wealth fund might not be an effective solution to our fiscal challenges.
Q: Shenoy has raised valid concerns about borrowing costs and fiscal implications. From a macroeconomic perspective, is India ready for a sovereign wealth fund?
Shah: Shenoy raises valid concerns and there are different perspectives on this issue. When GIC and Temasek were created, Singapore was not in a particularly strong fiscal position, but they managed to launch successful entities such as Singapore Airlines and DBS Bank. Similarly, India has significant public sector assets that could be better managed.
While we should not borrow excessively to finance investments, we should explore ways to use our existing foreign exchange reserves more effectively. Our current position includes more foreign exchange reserves than debt, which gives us some flexibility. Because our macroeconomic fundamentals are strong, experimenting with a small-scale sovereign wealth fund could pay off.
Q: What should be the initial size of the sovereign wealth fund and what types of investments should be considered?
Shah: Size and investment strategy are intricate details that require careful consideration. The fund should be managed by professionals, similar to GIC, Temasek and ADIA, to ensure effective and prudent investment decisions. The approach should be gradual, starting with lower-risk investments and possibly moving to higher-risk assets over time. This cautious strategy will help balance risk and return, while leveraging professional expertise.
For more details, see the attached video.
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