Will India invest in Tesla and Apple?

First, a short story about Sovereign Wealth Funds:

In 1938, Kuwait struck gold oil.

And the country realised that there was a lot of wealth lying unexploited in its backyard. Overnight, it would become rich! It could use this new found wealth to take care of all its citizens. Maybe not even have to tax them to run the country. Everyone would be protected for life.?

But over the next couple of decades, Kuwait had a nagging worry – what if it ran out of oil one day? What if the world didn’t need oil anymore? What would happen then??

So it decided to save up for a day when its backyard would become as dry as a bone.?

It set up an entity in 1953 and gave it the surplus oil cash to manage. And even though it wasn’t called a Sovereign Wealth Fund back then (the name was coined only in 2005), that’s what it was. And the goal was simple— the fund would invest this surplus money at high rates of return to generate a buffer for the country’s future. The fund would create a passive income of sorts. And the country could diversify and hedge its bet on oil by investing all across the world.

Soon enough, this concept caught on. Every country that had oil money set up an SWF. We’re talking about Saudi Arabia, UAE, and Norway. SWFs became all the rage. Even countries without oil, but with a budget surplus created through trade — such as Singapore — set up these funds.

Now there’s a reason we’re discussing SWFs today.?

Apparently, India’s in the mood to set one up.

Wait…what?

Yes, we know it seems quite confusing. We just said that SWFs are typically set up by countries with a large bank balance. And we don’t have oil. Nor do we have surplus money from exporting IT services.?

Rather, we run deficits. We have trade and fiscal deficits.?

Or simply put, we borrow money to run the country.

So we won’t blame you if your natural reaction is one filled with questions? –”Is an SWF even a wise idea? Where’s India going to get the money for this audacious dream??

And we’re going to try and lay it all out for you.

To understand whether this is a wise idea or not, we need to talk about where this money is going to come from.

Now some folks believe it might come from the massive forex reserves we’ve built up. We have over $680 billion worth of forex reserves that cover 9 months of imports. And that big pot of money has pushed many people to ask the Reserve Bank of India to use this to set up an SWF.

After all, if China can use forex reserves for its SWF, so can we, right??

But here’s the thing about forex reserves. Typically, a country builds reserves if it exports more goods than it imports – India doesn’t have that luxury. And it also gest forex when foreign investors make a beeline for the country — that’s in India’s favour today.

That means India’s forex reserve could be affected if investors take off. It isn’t really long-term, sticky money.

So we do need a good chunk of money set aside at all times.?

On the other hand, when China set up an SWF using its reserves in 2006, it had a couple of big things in its favour.

Firstly, because the country exported more than it imported, it earned a surplus of nearly $180 billion. And since China was an exporting nation, it knew that it would create such a surplus in future years too.?

Secondly, it had already amassed a mammoth $1.1 trillion worth of forex reserves in 2006. This gave them around 14 months worth of import coverage.

And put together, this meant China didn’t have to worry about using $200 billion for its SWF. Forex reserves be damned.

So even though we have significant reserves now, it still doesn’t quite sound like China’s story.

Okay. And what’s the other idea then?

Well, maybe the government should tap into its stake in public sector companies —ones such as SBI and HPCl. It could sell some shares, issue new shares, or even borrow against its shares.

A loan against shares?!

Yeah, we know that sounds bad.?

Especially since more borrowing isn’t a good thing. It will mean a rise in our fiscal deficit (where the government's revenue falls short of its spending). And it also adds to our interest burden — the government already pays a whopping ?7 lakh crores in interest annually.

But this might not be such a bad idea.

Because if you invest smartly, your returns can be far superior to the cost of financing the loan.

And New Zealand is a brilliant example of that. The country set up an SWF primarily to invest and help meet the pension requirements of its citizenry. Since 2003, the government contributed around $25 billion [New Zealand dollars] into the fund.?

The end result?

Well, this is what its latest Annual Report says:

“Since inception…the Fund has generated…$40.76 billion more than the Treasury Bill return for the same period…This out-performance shows wealth has been created relative to the opportunity cost of lowering debt…”

Basically, the fund has delivered massive outperformance. And the cost of the loans the government took to make those contributions didn’t really matter.

So maybe taking a loan against all those shares and raising a big pool of money to fund an SWF doesn’t seem too bad, no??

Just hire an ace fund manager and let them do all the hard work.

And this brings us to the final question — “What’s the real purpose of an SWF for India? Where will we invest the money?”

Okay, we know we asked “Will India invest in Tesla and Apple?”?

And that’s because SWFs typically do that – for example, Singapore’s Temasek has a stake in Nvidia and Norway’s fund has invested in Tesla.?

Maybe India’s SWF will do that too. We don’t know that yet.?

But apart from that, the word on the street is that India’s primary focus will be on investing in projects dealing with clean energy. Especially ones related to rare earth metals like lithium.

The reason for that is simple — it’s China again.

See, the Red Dragon controls the metals and minerals used to power EV batteries. In fact it produces about 60% of the world's rare-earth metals.

And since no one quite trusts China, every country is trying to get a foot in the door and prevent the country from monopolising what will be a crucial industry for the future of the world.?

Here’s an example from the Financial Times in August 2024:

“Qatar’s sovereign wealth fund has agreed to invest $180mn in TechMet, a Dublin-based mining investment vehicle backed by the US International Development Finance Corporation, the country’s development bank.

The investment by the Qatar Investment Authority is a significant moment in the geopolitical tussle between the US and China for control over supplies of rare earths, lithium and cobalt used to power electric cars.”

And it looks like that’s what India could do too. Ensure we’re directing some investments to the right places so that our interests are protected.

Now that’s not a bad reason to want to set up a Sovereign Wealth Fund, right?

What do you think? Does it make sense for India to have an SWF?

PS: We’ve heard rumours of India setting up an SWF since at least 2008. And we did set up something called the? National Investment and Infrastructure Fund (NIIF) as a quasi-sovereign wealth fund in 2015. We say quasi because although the fund would invest in core sectors in India, the money for the fund didn’t fully come from government coffers. We asked outside investors to chip in.?