SWF - Sovereign Wealth Funds are the unsung resilient survivors of the economic adversity witnessed by the world over the past two years. Once viewed suspiciously as conspicuous tools of the Middle East Arabs to bolster their private wealth, it turned out to be the only conglomerate of riches which did not diminish under the knife of recession. But not for all. The same story went way out of line for Abu Dhabi and a few others. The secret lied in the diversity of investments made.
Saudi Arabia made the hay while the sun shone because of its very safe approach of not being exposed to risky ventures whereas Abu Dhabi played the all gun blazing act. And the results are apparent. With Dubai World in tatters and the world markets still grappling with the situation, the word "CREDIT" is going to raise some bad memories for a long time.
A startling fact is the performance of China in all this fiasco. Now this should be of particular interest especially for India because a "How to be a super stable world power" book is being written in the backyard of India by the Chinese. Indian prowess on the stability front is always justified by the foreign reserves it holds.
But the Chinese realized the sustainability power of a SWF long time back and is way ahead of the Asian pack in that race, something which India should seriously consider as an alternative to foreign reserves. A glance at the above chart reflects where India stands at this front since its needless to say, foreign reserves still pose a risk. If for instance, the world recession deepens and say the foreign reserve being held in terms of payments pending from the USA or Europe begin to be faltered, the injuries would come fast and steadily on the Indian economy. Whereas a SWF, clearly remains safe, with constant earnings from the diverse funds it invests in, ensuring a clear way for wealth to continue in the bleakest of times.
Setting aside pools of money earned from the country's reserves is the future step to be taken by India. Usually the funding for a sovereign wealth fund comes from the central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. What is apparent is that the types of acceptable investments included in each SWF vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments.
Another story to be learnt is the way SAMA ( Saudi Arabian Monetary Authority) has done a commendable role by smartly investing the surplus cash from the starry days of 2002 -2007 of high earnings through the petrodollar. It did not splurge the excessive earnings by way of construction of dreamlands ( palm-islands in Dubai to be specific) or invest in risky ventures. It concentrated on bolstering its economy via focus on improving education, healthcare and public infrastructure thereby creating a multitude of jobs with the payments guaranteed till 2018 ! This caused the Saudi economy to ride through the bumpy ride of recession smoothly.
What needs to be seen is the twist the Indian success story takes. A few surprises, tougher approach and dexterity for getting things on the implementation cycle is the kind of mix which could still keep India competitive enough to earn respect as the future sustainable economic powerhouse. As the Indian Bollywood mantra goes, its best to ape a bestseller Hollywood movie rather than take the risk of being an original drag !
