Corporate Law

Wealth for Nations: The Rise of Sovereign Wealth Funds in Developing Economies

Binit Agrawal

Sovereign Wealth Funds are springing up across the developing world. However, there are concerns in relation to their funding and functioning.


Recent successes of Sovereign Wealth Funds (SWFs) have caught the attention of people across the world. In simple terms, SWFs can be defined as investment arms of governments. In 2017, Norway’s pension fund gave a return of a whopping $100 billion. Similarly, Singapore’s Temasek Holdings, Qatar Investment Authority, Kuwait Investment Authority, and Saudi’s Vision Fund in a tie-up with Softbank keep making headlines. This has inspired many other countries to set up such SWFs to bring home returns and use them to fund their growth. Developing countries like Turkey, India, Bangladesh, Romania, etc. are planning to or have launched their own SWFs. Most of the seed money for such funds is supposed to come from the reserves that the Central Banks of these countries are holding. However, there is a problem. These countries don’t have the money. In this post, taking the example of India, I will display why setting up of Sovereign Wealth Funds by developing countries is problematic. I will also try to find if there is a right model for developing countries to set up SWFs, and if India is going in that direction.

Arguments In Favour of a Sovereign Wealth Fund for India

Most arguments in support of an SWF for India are rooted in the claim that the Reserve Bank of India holds a huge reserve, some of which can be taken out to form an investment fund. The returns that accrue from this fund could be given to the government to fund its expenditure. Further, it is also contemplated that the focus of the fund will be on energy assets. This would allow India to exercise control over strategic assets which form a part of the energy supply chain. These may include petroleum refineries, mines, etc. Thus, it would act as a guard against heavy fuel prices.


The first and the most significant problem with the abovementioned argument is that it pre-supposes that the RBI’s assets are in the form of liquid cash, out of which an investment fund can be created. Even the Government, as was seen in the recent tussle that it had with the RBI, is under this notion. However, that is not the case. Let me break it down (please refer to the figure below for necessary information):


  • There are two sides to RBI’s balance sheet: Liabilities and Assets. The oft-cited 36 Lakh Crore figure refers to the assets of the RBI. However, a majority of these assets go towards servicing the liabilities of the RBI. These liabilities include money owed to foreign investors, households, firms, etc. Thus, most of the assets are not actually without encumbrances.
  • Some 9.69 lakh crore forms the reserves of RBI, which is that part of the assets which is not owed to outsiders. This is the sum into which the Government wants to tap. These are displayed in the liabilities side and are stored in the form of contingency funds (to release these funds when the economy receives a huge shock), currency and gold revaluation (to guard against price fluctuations of these assets), etc.
  • The Government argues that the reserve fund (especially the contingency fund) is of no particular importance as our country’s economy seems to be stable, and hence, should be released.
  • However, this suggestion by the Government is problematic. If the size of the contingency fund were to contract, it would mean that the total amount in the liabilities side would also contract. But, the balance sheet needs to be kept intact. Thus, there would need to be a commensurate decrease in the assets side, or alternatively, a commensurate increase in the notes in circulation on the liabilities side.
  • A reduction in assets side implies either a reduction in RBI’s investment in sovereign debt or a reduction in foreign currency assets. Given this would take a toll on the Indian Rupee, it is not a feasible option.
  • The ramification of this is that tapping into reserves of the RBI is akin to printing money to reduce fiscal deficit.
  • This is a dangerous proposal. Money printed for indiscriminate government spending is a perfect recipe for inflation, currency instability and all other economic ills.
  • This is aside from the concerns of possible economic downturns, fluctuations in oil prices, currency fluctuations, etc. These concerns require that RBI always have sufficient reserves. One figure which displays our vulnerability is that of our foreign exchange debt, which stands at $306 billion. This is almost as big as our foreign currency assets, which stand at $316 billion.

Thus, the first problem with releasing the RBI’s reserves is that it has consequences for the overall economy.

The second issue with using RBI’s surplus reserves is that the reserves are a surplus of RBI, and not the entire country. Imagine a woman who runs two shops. At one she makes a loss of ₹100, and at another, she makes a surplus of ₹30. She thus has a loss of ₹70. In such a scenario, she cannot buy something which costs ₹15, asserting that she has a surplus of ₹30 at one shop. Similarly, India runs a huge current account deficit of 2.7-2.8 per cent of its GDP. This means that India is actually borrowing money to pay for its imports. Thus, India is not a surplus nation merely because its Central Bank is in surplus. Consequently, we don’t actually have the money to invest abroad. Sovereign funds are almost always created when a country is bringing in foreign currencies because of export surplus. This allows exporting countries to create income earning assets for a future when they might run out of the goods they are exporting. For example, SWFs were traditionally created by oil exporting countries. Presently, countries like Norway, China, Gulf nations, Singapore, etc. have a sovereign wealth fund since they are surplus nations. Consequently, they have the money to invest abroad in the form of such investment funds. More so as most of them are small nations lacking lucrative investment opportunities inside.  A person can become an investor only when he has big savings. One does not borrow money in order to invest it.

Thirdly, can we deploy RBI’s reserve money meant for economic stability to acquire oil and energy assets abroad? This has its own share of issues. The foremost being that of risk. Once the money is invested, it’s a point of no return, and the reserve money will be open to the travails of the market. The returns will fluctuate depending on energy prices, and RBI or the Indian government will have no control over it. This fact can be gauged from the recent fluctuations in crude prices. In such scenarios, the value of the sovereign investments may fall hugely, risking the central banks buffer money. This is not unprecedented. We only need to go back to the 2008 financial crisis to find that SWFs suffered losses of over 40%. In fact, Norway’s sovereign fund, which collected over $100 billion in 2017, lost around $23 billion in the first quarter of 2018. This can be attributed to the dipping values of the shares of tech companies like Facebook, Tesla, and Apple.

Fourthly, another important issue is that of India’s ability to maintain the efficiency and efficacy of such funds. Almost all the successful SWFs come from countries known for their technocratic governments, and their ability to rein over corruption wherever needed. India, on the other hand, has constantly failed to curb corruption in most of its institutions. This raises real apprehensions on India’s ability to build an investment institution which is professionally managed and is free from executive strangles. This too is not unprecedented. Malaysia’s 1MDB (an investment fund of the Malaysian government) is infamous because of the huge corruption scandal which rocked it, taking the Prime Minister himself into the fold.

A Possible Roadmap for SWFs by Developing Countries

These issues display that a Sovereign Fund is not completely viable for India, or for similarly positioned nations. However, this does not mean that these nations cannot start towards creating similar institutional funds, which are smaller in scale, and on an experimental basis. Just like India created institutions like ISRO when it did not really have the money to do so, it can experiment with a small scale sovereign wealth fund. This, in fact, has already been done by the creation of the National Investment and Infrastructure Fund Limited (NIIFL). The money committed to the fund is limited to $3 billion over a period of 3-4 years. This is a rather small part of our budget. Further, NIIFL is merely anchored by the Government of India and is run in collaboration with institutional and private investors. Hence, the fund is professionally managed. Moreover, the fund is inward focused. The investments are made within the country rather than outside it. Its current portfolio comprises mostly of investments in Indian ports, and supply chain logistics. This has provided the Indian infrastructure sector with an additional source of capital.

This, according to me, is a step in the right direction and should prove as a model for nations trying to create a Sovereign Wealth Fund. India’s model is unlike that of Turkey, another developing nation which has recently created its SWF. It holds assets of over $200 billion and is headed by President Erdogan himself. As one might conclude, the fund has been a failure since its very inception.


To conclude with, Sovereign Wealth Funds in themselves are increasingly important public institutions. Especially, because they make the public, owners of companies. In a possible future, when employment opportunities will reduce, and AI and Robotics will take over, SWFs will be an important source of income for the government and will allow for social schemes. They are also important to guard us against ever-rising income inequalities. However, such funds must be created after sufficient deliberation and practice.

Binit Agrawal is a 3rd Year student at National Law School of India University, Bangalore, and a Founding-Editor of LSPR.

Image source: Qrius

Categories: Corporate Law

1 reply »

  1. What a brilliant analysis of the issue with respect to SWF. The writing is simple and lucid, making it a great read and a great starting point of research for anyone interested in the topic/ issue remotely. Very comprehensive and well researched. Kudos Binit, keep writing!

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