Money and the state

Purists will protest the directive from the Prime Minister's Office (PMO) to the finance ministry asking it to come up with ways to identify the investments made in India by sovereign wealth funds (SWFs), to assess the amount of such investments and to come up with guidelines on how to deal with such investments. One view is that if FDI and portfolio investments are allowed in most sectors, subject to sectoral and other caps, then nothing is wrong with SWFs coming in like other investors. In any case, Temasek has large investments in India and is essentially an SWF, so how can the rules be different for others in the same category? Also, the argument goes, SWFs are proving themselves to be good corporate citizens in the current global crisis "" estimates put the capital invested by SWFs into recapitalising stressed global banks at over $40bn. In any case, according to this view, money is fungible and will find its way into the market, if not directly then indirectly.

Much of all this is true, but it is equally true that the world has never seen anything like SWFs before, and so it is natural to examine what rules are appropriate in the new context. SWFs, according to the International Monetary Fund (IMF), are likely to grow threefold to $6-10 trillion in the next five years, so it is only natural that governments will wonder about the implications "" especially since the bulk of that money will come from places like China and oil-rich West Asia or Russia, none of which has an investment history that is divorced from state control. India is not the first country to worry about such investments, since they could conceivably inject an element of politics and state policy into an area that has so far been treated as a matter of unalloyed finance. For instance, if a Chinese SWF were to gain substantial control of India's largest telecoms firm, there would be reason for the government to be concerned "" it is one thing for an international financial investor to have a stake in such a firm, and an altogether different thing for the stake to be controlled by the Chinese government.

This explains why the IMF has been tasked with the job of evolving acceptable codes of conduct for such funds. Starting last October, the IMF has been in a dialogue with various countries to arrive at what safeguards they're looking for; it has simultaneously begun a dialogue with SWFs to help identify their investment objectives and figure out what their governance structures are. Later this month, the IMF's executive board will discuss a paper that outlines the Fund's work programme with respect to SWFs. It is hoped that, by the time of the Fund's annual meetings in October, a draft code will have been presented to the Executive Board. Given the expanding role of SWFs, India would do well to take part in this dialogue and make sure that its concerns are taken on board.