Long time No SWF

You must have heard how sovereign wealth funds (SWFs) all over the world are busy buying stakes in various companies. These funds are making use of the current turmoil in the global markets to their advantage. So, for companies who are in dire need of capital infusion, these funds come as saviours and flush them with cash, in the current state of credit crunch. They call them “passive” investments, but I believe “strategic” would be a more appropriate word.

Some such companies who have sold their stakes are investment banks. They are bleeding due to the subprime saga and the ensuing credit crunch is affecting them more than any other set of companies. As such they are taking all steps possible to retain their credibility, from firing CEOs to gathering funds. Various SWFs have lately taken stake in a number of such ailing banks. You get the details from any news source. And those who have not (like the Kuwaiti SWF) are planning to do so soon.

I believe it is high time that India has its own SWF. So, from the vast forex reserve of more than $270bn, India can set aside, say $50bn. Even after doing this, various ratios like Import cover (in months) etc. will still look favourable. This money can be used for buying “strategic” stakes in some companies. For example, may be an ailing investment bank that is left to sell a share. Or invest in a upcoming technology company, which would also be in line with the image of India in the global arena.

The main idea behind suggesting such measures is that the money needs to be put to a more productive use. Previously, there were suggestions about using some of it for investment in infrastructure. Again the essential idea remains the same. The argument given is that there is enough money available for infrastructure investments (through loans etc.). If that is the case, employ these funds to some other place instead of investing them in U.S. treasuries.

The whole loan argument can actually be slapped in the face of those who argue. Firstly, as you would know, more than 21% of the government’s income goes in paying the interest on various loans which have been taken (majority of this loan is domestic). Instead of relying on more foreign loans, the reserves could be used to repay these loans so that some burden of the interest payments is shed.

Anyways, much has already been written about the needs of a SWF (and in general, about more productive use of the reserves). What I am hoping for a business daily to have its headlines as “Indian SWF acquires x% stake in ABC company”.