Sep 26

Sep 26 Why A Sovereign Wealth Fund Will Not Solve India’s Capital Shortage

*(Photo: Unemployed Indians waiting in line to apply for jobs.)*

September 25, 2024

By Romar Correa*

Government-run companies, or public sector enterprises as they are called in India, fill in the blank spaces of an economy which are ignored by private companies. Given their focus on earning profits, private owners do not invest in businesses where demand, supply and pricing are not favorable.

In India, the original role of government-run enterprises was to invest large sums in major infrastructure schemes like road and rail networks. Also, in the 1950’s, India’s economic planners and officials set up government companies to supply coal, iron, steel, power, and other inputs to private firms at a lower cost, often by selling at a loss. Yet, for decades, government enterprises faced charges of a casual attitude to profits and an unmotivated workforce.

My reflections here are prompted by the following news in The Mint - and other Indian newspapers: The Indian “government plans to pool its shares in listed public sector companies (as well as the Specified Undertaking of the Unit Trust of India…) to build India’s first sovereign wealth fund …The fund will sell new and existing shares, receive dividends, raise money from strategic investors, and borrow against its shares to raise capital for its investment corpus.”

Sovereign wealth funds (SWF) were first set up by countries to conserve, invest and grow profits gushing in from their sizeable exports of a natural resource. In fact, today, 59% of the $12.4 trillion held by SWFs are funds generated by natural resources, as in the case of oil-rich Norway and Saudi Arabia. In sharp contrast, India has no major natural resource exports which can fund its SWF.

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*Romar Correa retired as the Reserve Bank of India Professor of Monetary Economics, Bombay University.