1-February -2025-Special-Article

BHARAT SOVEREIGN WEALTH FUND (BSWF)

India is considering establishing the Bharat Sovereign Wealth Fund (BSWF) or The Bharat Fund (TBF) to utilize the nation’s untapped wealth for economic growth and strategic investments. This move aims to unlock capital from public sector assets, diversify investments, and strengthen India’s financial position globally.

What is a Sovereign Wealth Fund (SWF)?

A Sovereign Wealth Fund (SWF) is a government-owned investment fund created from national surpluses.

These funds help generate wealth through investments, ensuring economic stability and financial security.

They can be funded by trade surpluses, natural resource revenues, or budget excesses.

Key Characteristics (Based on Santiago Principles, 2008):

• Government Ownership: Managed by national or sub-national governments.
• Investment in Foreign Assets: Includes investments in international markets.
• Financial Objectives: Aimed at financial returns rather than immediate policy objectives.

Types of SWFs

• Stabilization Funds: Minimize economic shocks by stabilizing volatile revenues.
• Future Generation Funds: Preserve national wealth for long-term benefits.
• Public Benefit Pension Reserve Funds: Support pension systems to meet long-term obligations.
• Reserve Investment Funds: Manage foreign exchange reserves and stabilize currency fluctuations.
• Strategic Development Funds: Invest in key industries to support national growth.
• Foreign Currency Reserve Assets: Enhance currency stability and trade power.

Global Examples of SWFs

• Norway’s Government Pension Fund Global: Largest SWF with assets of USD 1.7 trillion.
• China Investment Corporation: Holds USD 1.35 trillion in assets.
• Abu Dhabi Investment Authority: Manages USD 993 billion.

India’s Experience with SWFs

• 2007-08: SWF discussions gained traction due to large capital inflows (~USD 108 billion) but were impacted by the Global Financial Crisis.
• 2010-11: The Planning Commission proposed a USD 10 billion SWF funded by forex reserves and public sector units (PSUs).
• 2015: National Investment and Infrastructure Fund (NIIF) was launched as India’s key structured investment fund.

Why India Needs a Sovereign Wealth Fund?

Unlocking Public Sector Wealth:

• Estimated ₹40 lakh crore (USD 450-500 billion) worth of public sector assets remain underutilized.
• A SWF can enhance the returns on these investments.

Reducing Fiscal Deficit:

• A 2% divestment from government-owned companies could generate USD 10 billion annually.
• This could reduce India’s fiscal deficit from 4.9% to 4.6% of GDP.

Diversifying Investments:

• Reducing dependence on traditional “safe” investments (e.g., US Treasuries).
• Encouraging investment in diverse, high-growth sectors for better returns.

Utilizing Excess Foreign Exchange Reserves:

• India’s forex reserves cover over nine months of imports.
• A portion can be allocated to SWF investments to generate higher national wealth.

Supporting Strategic Sectors:

• Investments can boost growth in electric vehicles, hydrogen energy, semiconductors, biotechnology, and AI.
• Helps position India as a leader in emerging global industries.

Social Welfare & Infrastructure Development:

• Generates non-debt financial resources for public welfare programs.
• Enhances fiscal flexibility for long-term infrastructure projects.

Enhancing India’s Global Standing:

• SWFs can support global ventures, fund disaster relief, and invest in other countries’ SWFs.
• Strengthens India’s soft power and international influence.

Challenges and Concerns of a SWF in India

Persistent Current Account Deficit (CAD):

• Unlike nations with surplus wealth (e.g., oil-rich nations), India often runs a current account deficit.
• Creating a SWF could strain financial resources.

Macroeconomic Risks:

• A global slowdown, rising debt, and financial instability could lower SWF investment returns.
• Mismanagement could worsen economic vulnerabilities.

Geopolitical Uncertainty:

• Trade restrictions and shifting global alliances may impact SWF investment strategies.
• Cross-border regulations could restrict foreign investments.

Environmental Risks:

• Investing in industries like fossil fuels could result in financial losses due to climate policies.
• Sustainable investment strategies are crucial to avoid stranded assets.

Technological and Cybersecurity Risks:

• SWFs handle large public funds, making them vulnerable to cyber threats and fraud.
• Rapid advancements in AI and blockchain may disrupt traditional investment models.

Way Forward

Governance and Transparency:

• Develop a clear legal and regulatory framework for SWF operations.
• Ensure adherence to Santiago Principles to maintain accountability and efficiency.

Strategic Asset Allocation:

• Prioritize high-growth sectors like AI, biotech, EVs, and semiconductors.
• Partner with established global funds for co-investment opportunities.

Fiscal Prudence and Sustainability:

• Adopt a phased investment approach to balance fiscal stability and investment expansion.
• Avoid excessive reliance on foreign exchange reserves.

Robust Risk Management:

• Implement strategies to handle market volatility and economic downturns.
• Incorporate Environmental, Social, and Governance (ESG) principles for sustainable investments.

Conclusion

The establishment of a Bharat Sovereign Wealth Fund (BSWF) could unlock new financial opportunities, strengthen India’s fiscal position, and support national development. While challenges exist, careful planning, strong governance, and strategic investments can ensure its success. By leveraging national wealth effectively, India can position itself as a major global economic player while promoting long-term prosperity for its citizens.

Mains Question:

1. Discuss the need for a Sovereign Wealth Fund (SWF) in India, highlighting its potential benefits and associated challenges. Suggest measures to ensure its effective implementation. (150 WORDS)