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What is Strategic Overseas Fund?

What is Strategic Overseas Fund?

Tag: GS 3 || Economy || External Sector || Foreign Trade

Why in news?

  • Given the need for India to secure its mineral demands, to achieve its food requirements, and access critical resources for running sensitive industries back home, India should look at carving a committed fund.

What?

  • Overseas investments in the developing country context are no more confined to a mere expression of financial prowess to explore overseas markets.
  • Given the evolving geo-economics, the need to –
    • secure one’s long-term interest in areas like scarce natural resources, agricultural land, and
    • creation of strategic infrastructure in key locations abroad, amongst others, becomes paramount.

ODI

  • US, China, Japan: Since the beginning of this century, the world has witnessed an outward direct investment of $9.7 trillion, with the US leading the pack, even as China closes in to occupy the second position currently being held by Japan.
    • China’s cumulative ODI stood at $767 billion during 2000 to 2017.
  • India: India’s, on the other hand was 11 times lower at just $54 billion that is equal to just 1 per cent of global investments in these 17 years.
    • According to the RBI, India’s ODI in 2018 was one of its lowest in recent times.

India

  • FI support: Till the middle of the last decade financial institutions supported overseas acquisitions.
    • However in recent times there has been an increasing receptiveness towards setting up dedicated funds by sovereign entities to undertake such overseas investments, with most being of a strategic nature.
    • This trend has led to the proliferation of a host of dedicated funds globally catering to their domestic interest in the short to medium term.

China

  • Over the years, Chinese financial institutions such as China EximBank, China Development Bank, China Investment Corporation – all sovereign entities set up to facilitate Chinese business growth overseas – have been at the forefront to manage these multiple funds.
  • Many of these institutions have partnered with the likes of Inter-American Development Bank (IDB) in Latin America region, Hungarian Exim Bank in Eastern Europe, Russia Direct Investment Fund in CIS, amongst others to capitalise on the financing gap and potential in these select geographies.
  • Analysis shows that during the period 2003 to 2018, Chinese investments in select strategic sectors have been twice that of India.
  • In fuel resources and agricultural food, Chinese investments abroad are as high as 4-7 times that of India in the last 15 years.
  • As an alternative to western development-led finance, China in recent times has also fronted the likes of NDB, the AIIB and the Silk Road Fund, symbolising its growing influence.

Other global examples

  • Even the European Investment Bank has set up the African Lion Mining Fund to invest in early stage equity in mineral resource companies, particularly in gold and base metals, besides mineral commodities such as industrial minerals, gemstones.
  • Besides KfW (Government of Germany) and Deutsche Bank have also established the Africa Agriculture and Trade Investment Fund to uplift Africa’s agricultural potential.
  • The US in 2018 formed the US International Development Finance Corporation, to pursue its strategic interests through its own government’s backing.
    • This initiative is considered as an effort towards specifically countering China’s influence globally, and furthering the US foreign policy goals whilst fostering participation of the private sector abroad.

India – way ahead

  • Sovereign Wealth Fund: While India today exhibits global aspirations to seek foothold across geographies, it is largely bereft of any such dedicated fund to boast of.
    • However, the demand here is not to create a Sovereign Wealth Fund whose objectives are to get better returns from its investments, amongst other purposes.
    • The argument here is for a strategic fund which facilitates India’s investments overseas in critical areas.
  • Specialised government financial institution: The dedicated overseas strategic fund could be housed and administered by a specialised government financial institution, akin to the Chinese model.
    • The fund could be meant for strategic investments by Indian PSUs and quasi-sovereign institutions planning cross border investments of longer tenor.
  • Diverse areas: The proposed fund could also become an arm of an existing financial institution with specialised operations in diverse areas.

Mains question

  • What is Strategic Overseas Fund? How it can help India secure its long term growth goals?