NEW DELHI, July 20 (Reuters) - India is considering setting up a sovereign wealth fund with more than $10 billion in assets to buy energy assets abroad to feed growing domestic demand, senior government officials told Reuters on Wednesday.
But the sources said the plan to create the country’s first sovereign wealth fund (SWF) was still at an early stage amid concerns from the central bank about setting aside part of the country’s foreign exchange reserves for the scheme.
“There is a group which is examining this but no decision has been taken,” Montek Singh Ahluwalia, deputy chairman of the powerful Planning Commission of the Indian government, told Reuters.
India’s foreign exchange reserves stood at more than $314 billion as on July 8.
“The original size of the fund was $10 billion but since commodity prices have increased in the meanwhile, we believe that the size of the fund, if approved, could be increased,” said another senior government official who is part of the group examining the proposal. The official declined to be identified.
“The final figure will only be decided after wider consultations,” he said.
A senior official at the Reserve Bank of India, meanwhile, said the central bank was worried about financing a sovereign wealth fund, given the large amounts of capital the country needs to fund a massive current account deficit.
That deficit was 2.6 percent of gross domestic product for the fiscal year ending in March 2011.
“There is no formal exchange on this,” the senior official told Reuters. “We have to see the proposal. But we have already made our stance clear that we can’t use dollar reserves, which is borrowed money for setting up a SWF.
The proposal to set up such a fund was first mooted by the oil ministry a few years ago over concerns that India was falling behind China in acquiring energy assets abroad, particularly coal änd gas fields and mining blocks in different parts of the world, including Africa.
Unconventional energy sources such as shale gas, coal-bed methane and oil sands are also attracting increasing attention from China and elsewhere as traditional oil supplies dry up.
The Indian economy is expected to grow by nearly 8 percent in the current fiscal year ending in March, according to a Reuters poll released on Monday, and its hunger for energy is expected to keep pace with it.
“India is basically a current account deficit country and there is a good amount of demand for imports,” said another senior official at the Indian central bank.
We need our foreign exchange reserves for tiding over balance of payments problems and so our stance has been to not use foreign exchange reserves for other purposes.”
Another option being considered by the government is to set aside funds from its budget to seed the sovereign wealth fund.
“We are looking at budgetary allocations ... but first everybody has to be on board and the proposal has to be accepted before being finalised”, said the government official.
However, funding the SWF through budgetary allocations may be difficult for the government in a fiscally strained year, and next year the government may decide to spend more on populist schemes as it heads into elections in two key states of Gujarat and Uttar Pradesh, seen crucial to the Congress party’s political fortunes.
The sovereign wealth fund plan was due to have been discussed by an inter-ministerial group this month but the talks were postponed.
Editing by Paul de Bendern