From Mr Kavaljit Singh.

Sir, New Delhi’s renewed interest in establishing a sovereign wealth fund (report, March 18) should be treated with caution. The preconditions for establishing a sovereign fund are lacking in India.

Such funds are established to manage excessive foreign exchange reserves, commodity exports, the proceeds of privatisations and fiscal surpluses. Unlike China and other east Asian countries, which have established such funds on sustained current account surpluses, India has been running persistent current account deficits. Its current account deficit touched $29.8bn in fiscal 2009 as against $15.7bn in fiscal 2007.

Unlike the Middle East, India does not have any dominant exportable commodity (such as oil or gas) so as to generate significant surpluses. It continues to be a huge net importer of oil and gas. The country’s current account deficit is widening despite steady growth in software services exports and a rise in workers' remittances from overseas Indians.

Its persistent current account deficits have been financed by large capital inflows in the form of portfolio investments and other volatile capital flows that are subject to capital flight.

Given the overriding presence of volatile capital flows in India’s forex reserves, coupled with vulnerability to external shocks, it would be erroneous to consider its foreign exchange reserves ($280bn) as a position of strength.

External debt has been rising steadily for the past few years on account of higher borrowings by the Indian companies and short-term credit. Besides, India also runs a perennial fiscal deficit.

For New Delhi, the first priority should be to free the nation from hunger, malnutrition and illiteracy rather than financing the acquisition of companies and assets abroad. In this regard, a portion of the country’s forex reserves could be prudently used in the improvement of physical infrastructure, education, health and financial services, particularly in rural India.

Kavaljit Singh,
Public Interest Research Centre,
Delhi, India