Unit II- Foreign Capital and Development –

Capital Formation-
Capital formation (or accumulation) is regarded as one of the important and
principal factors in economic development.

According to Nurkse, the vicious circle of poverty in underdeveloped countries

can be broken through capital formation.

- Reasons for Low Rate of Capital Formation in Developing country

- Sources of Capital Formation The process of capital formation involves three

steps: (i) increase in the volume of real savings, (ii) mobilisation of savings
through financial and credit institutions, and (iii) investment of savings.

internal and external sources of capital formation

(1) Internal or Domestic Sources-
(i) Increase in National Income, (ii) Savings Drive, (iii) Establishment of
Financial Institutions, (v) Gold Stores, (vi) Perpetuation of Income Inequalities.
Since the mass of the people have a low marginal propensity to save in
underdeveloped countries, it is the higher income groups with a high marginal
propensity to save that can do saving and investment for capital formation

(2) External Sources.

Private foreign investment – FDI, FPI, ADR, GDR,

Public foreign investment – Sovereign Wealth Fund, Foreign aid – Tied and
untied

I Meaning and role of foreign capital in economic development-

- Foreign capital is an external sources of capital formation.

As per the Michel Boyle, Foreign investment involves capital flows from one
country to another, granting the foreign investors extensive ownership stakes in
domestic companies and assets.

Foreign investment denotes that foreigners have an active role in management as

a part of their investment or an equity stake large enough to enable the foreign
investor to influence business strategy.

- A modern trend leans toward globalization, where multinational firms have

investments in a variety of countries.

- Large multinational corporations will seek new opportunities for economic

growth by opening branches and expanding their investments in other countries.

- Foreign direct investments include long-term physical investments made by a

company in a foreign country, such as opening plants or purchasing buildings.

- Foreign indirect investment involves corporations, financial institutions, and

private investors that purchase shares in foreign companies that trade on a foreign
stock exchange.

II Importance of foreign capital-

- LDCs are heavily dependent on the centre for foreign capital-

- Foreign capital leads to “external orientation” of LDCs by exporting primary

commodities, importing manufactures and making them dependent for
industrialisation of their economies.

- If there were no foreign trade, foreign capital would not flow from the rich to
the poor countries.
- According to Myrdal, International trade has strong backwash effects on the
LDCs, hence foreign investment is most important.

The problem of external debt of LDCs is a serious one because they depend
heavily on inflows of capital from abroad to finance their development needs.

FC helps to increase of production independent of the adequate domestic supply

of capital, stimulate the growth of capital and by its example, break the chain of
habits, stimulate new ideas, develop the sense of economic aspiration and
foresight and generate new wants. Mill believed that foreign capital might not
raise the levels of living at any rate in the short run, but it could at least be a
powerful stimulus to economic development.

In the absence of adequate domestic resources for capital formation, it is

necessary to import foreign capital in the form of loans and grants from advanced
countries without any ‘strings.’

But the best course is to start joint ventures whereby foreign investors bring
technical know-how along with capital, and they train local labour and enterprise.

Capital can also be imported indirectly by paying for through exports. This is the
best policy because exports pay for imports.

But it is not possible for a backward economy to increase its exports to the level
of capital imports in the initial stage of development.

Flying Geese Paradigm

The term, flying geese, which Japanese economist, Kaname Akamatsu used for
the first time in 1935, came from the graphic presentation of three timeseries
curves for a particular product group (or more broadly a particular industrial
sector).
Fist the MNCs import product, the second represents its domestic production,
and the third presents its export. They – in an import-production-export (M-P-E)
sequence – all rise and fall forming an inverted V or U shape.
With the spirit of team work most MNCs fly with group from one country to
another
- The M-P-E sequence for each particular product group indicates the change of
competitiveness of the national economy in producing the product group.
Competitiveness in production as such does not exist during the period when the
domestic market for the product group is supplied totally by imports (i.e. no local
production).
- In due course, competitiveness is expected to rise with the commencement of
local production. As the competitiveness rises further, not only are imports being
increasingly replaced by locally supplied products but some excess products
eventually also exported (i.e. a vent for surplus).
Initially, products are simple, crude and cheap, but gradually the level of quality
is elevated. This sort of procedure is repeated, and eventually leads to a process
of national economic development with the import of consumer goods being
gradually taking over the import of machinery.
- Akamatsu’s FG paradigm includes
i) the M-P-E trade pattern for consumer and capital goods;
ii) the sectoral shifts of production and export from consumer to capital goods,
and
iii) the inter-national alignment from advanced to backward countries in
accordance with their stages of development.
MNCs Helpful to LDCs-
Some dependency economists argue that foreign investment and MNCs exploit
LDCs by way of profit remittances, royalties, etc. But this view ignores their
contribution to the development of LDCs when they reinvest their profits in
increasing production for domestic market and export. Earnings from export help
in correcting their BOP deficit.
Capitalism not always Harmful.
Critics point out that the spread of capitalism in LDCs has led to development
rather than underdevelopment of many LDCs.
For instance, China was underdeveloped due to political factors, internal disorder,
etc. rather than the spread of capitalism.
On the other hand, Shanghai, Manchuria and Hong Kong developed due to
capitalist penetration.
Cuba and East European countries remained underdeveloped due to their political
relations with the Soviet Union.
III Problems of foreign capital-
In the absence of adequate public savings and the flow of foreign capital, Keynes
advocates deficit financing

According to Rao, in underdeveloped countries “the old-fashioned prescription

of ‘work harder and save more’ still seems to hold as the medicine for economic
progress” than the Keynesian hypothesis that consumption and investment should
be increased simultaneously.

Technological Dependence

The peripheral countries use excessively capital-intensive technologies imported

from the developed countries of the centre.

These technologies are inappropriate to the production and consumption needs of

LDCs and are sold by multinational corporations (MNCs) of developed countries.

The technological dependence of LDCs on DCs arises because of the urgency of

importing technologies as they cannot innovate them
The lack information about the availability of appropriate technologies which
leads to exploitation of LDCs due to their weak bargaining power. MNCs lead to
economic and political distortions in LDCs.

Trade and Unequal Exchange

Dependency economists contend that DCs at the centre exploit LDCs of the
periphery by forcing them to specialise in the export of primary products with
inelastic demand with respect to both price and income.

Foreign capital from DCs controls major sectors of LDCs with the result that there
are large outflows of profit, interest and principal.

- Political risk, exploitation of natural resources, dependency

IV Private foreign investment –

1) FDI-
A foreign direct investment (FDI) is a purchase of an interest in a company by
a company or an investor located outside its borders.

Generally, the term is used to describe a business decision to acquire a substantial

stake in a foreign business or to buy it outright in order to expand its operations
to a new region.

Foreign direct investment frequently goes beyond capital investment. It may

include the provision of management, technology, and equipment as well.

As per the world Bank Report 2012, FDI includes "mergers and acquisitions,
building new facilities, reinvesting profits earned from overseas operations, and
intra company loans". In a narrow sense, foreign direct investment refers just to
building new facility, and a lasting management interest (10 percent or more of
voting stock) in an enterprise operating in an economy other than that of the
investor
Greenfield FDI

The term "green-field investment" gets its name from the fact that the company—
usually a multinational corporation (MNC)—is launching a venture from the
ground up—plowing and prepping a green field.

These projects are foreign direct investments—known simply as direct

investments—that provide the highest degree of control for the sponsoring
company.

Green-field investments carry the same high risks and costs associated with
building new factories or manufacturing plants.

-Greenfield FDI is a New Businesses types of FDI

Risks and Benefits of Green Field Investments

Developing countries tend to attract prospective companies with offers of tax

breaks, or they could receive subsidies or other incentives to set up a green-field
investment.

While these concessions may result in lower corporate tax revenues for the
foreign community in the short run, the economic benefits and the enhancement
of local human capital can deliver positive returns for the host nation over the
long term.

As with any startup, green-field investments entail higher risks and higher costs
associated with building new factories or manufacturing plants.

Smaller risks include construction overruns, problems with permitting,

difficulties in accessing resources and issues with local labour.

Companies contemplating green-field projects typically invest large sums of time

and money in advance research to determine feasibility and cost-effectiveness.
- Vadodara-Mumbai Expressway is one of green field project in India

FDI in India
ministry of commerce, analysed data by business standard 2021

FDI is when a company takes controlling ownership in a business entity in

another country. With FDI, foreign companies are directly involved with day-to-
day operations in the other country. This means they aren’t just bringing money
with them, but also knowledge, skills and technology.

FDI is an important monetary source for India's economic development.

Economic liberalisation started in India in the wake of the 1991 crisis and since
then, FDI has steadily increased in the country. India, today is a part of top 100-
club on Ease of Doing Business (EoDB) and globally ranks number 1 in the
greenfield FDI ranking.

Routes through which India gets FDI

Automatic route: The non-resident or Indian company does not require prior nod
of the RBI or government of India for FDI.

Govt route: The government's approval is mandatory.

The company will have to file an application through Foreign Investment

Facilitation Portal, which facilitates single-window clearance.

The application is then forwarded to the respective ministry, which will

approve/reject the application in consultation with the Department for Promotion
of Industry and Internal Trade (DPIIT), Ministry of Commerce.

DPIIT will issue the Standard Operating Procedure (SOP) for processing of
applications under the existing FDI policy.

a) Sectors which come under the ' 100% Automatic Route' category are
Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and
other services under civil aviation sector), Airports (Greenfield + Brownfield),
Asset Reconstruction Companies, Auto-components, Automobiles,
Biotechnology (Greenfield), Broadcast Content Services (Up-linking & down-
linking of TV channels, Broadcasting Carriage Services, Capital Goods, Cash &
Carry Wholesale Trading (including sourcing from MSEs), Chemicals, Coal &
Lignite, Construction Development, Construction of Hospitals, Credit
Information Companies, Duty Free Shops, E-commerce Activities, Electronic
Systems, Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT &
BPM, Leather, Manufacturing, Mining & Exploration of metals & non-metal
ores, Other Financial Services, Services under Civil Aviation Services such as
Maintenance & Repair Organizations, Petroleum & Natural gas,
Pharmaceuticals, Plantation sector, Ports & Shipping, Railway Infrastructure,
Renewable Energy, Roads & Highways, Single Brand Retail Trading, Textiles &
Garments, Thermal Power, Tourism & Hospitality and White Label ATM
Operations.

b) Sectors which come under up to 100% Automatic Route' category are

 Infrastructure Company in the Securities Market: 49%

 Insurance: up to 49%

 Pension: 49%

 Petroleum Refining (By PSUs): 49%

 Power Exchanges: 49%

Government route

Sectors which come under the 'up to 100% Government Route' category are

 Banking & Public sector: 20%

  Broadcasting Content Services: 49%

 Multi-Brand Retail Trading: 51%

 Print Media (publishing of newspaper, periodicals and Indian editions of

foreign magazines dealing with news & current affairs): 26%

- In India, From 2012, FDI regulations in India now allow 100% foreign direct
investment in single-brand retail without government approval, and 51 per cent
in multi Brand.

Multi-brand retail trading is selling products of different brands under one

roof. For example, Big Bazar, Reliance, Shopper Stop etc. These establishments
sell products of different brands at one establishment.

In January 2012, the government allowed 100 percent FDI in single brand retail
under the automatic route, permitting foreign investors to set up shop in India
without the government's approval.

Commerce Minister, Anand Sharma also announced 100% single brand FDI
notification with the requirement of 30% local sourcing. "The move will attract
investment, create employment,"

FDI prohibition

There are a few industries where FDI is strictly prohibited under any route. These
industries are

 Atomic Energy Generation

 Any Gambling or Betting businesses

 Lotteries (online, private, government, etc)

 Investment in Chit Funds-

 Nidhi Company-
A Nidhi company is a type of company in the Indian non-banking finance
sector, recognized under section 406 of the Companies Act, 2013. Their core
business is borrowing and lending money between their members. They are
also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and
Mutual Benefit Company.

- Nidhi Company is a non-financial banking company which can either lend

or accepts deposits only whereas the latter

- Nidhi” is a Hindi word, which means finance or fund. Nidhi means a

company which has been incorporated with the object of developing the habit
of thrift and reserve funds amongst its members and also receiving deposits
and lending to its members only for their mutual benefit.

Chit fund is also a agency as Nidhi Company but they only accept instalments
over a fixed period of time which is paid by its members.

they neither do lend nor accept the amount as a whole unlike the Nidhi
Company, they just do accept amounts in small installments.

Chit finance schemes might be conducted by composer financial institutions

or might be unorganized schemes conducted among companions and relatives.

Chit support likewise paid an important role in the financial development of

people of a few states, for example, Kerala.

- Hedge funds are actively managed investment pools whose managers use a
wide range of strategies, often including buying with borrowed money and
trading esoteric assets, in an effort to beat average investment returns for their
clients.

 Agricultural or Plantation Activities (although there are many exceptions

like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry,
etc)
  Housing and Real Estate (except townships, commercial projects, etc)

 Trading in TDR’s

 Cigars, Cigarettes, or any related tobacco industry

FDI inflow

During the fiscal ended March 2019, India received the highest-ever FDI inflow
of $64.37 billion.

The FDI inflows were $45.14 billion during 2014-15.

FDI in Education (www.fdi.finance)

 The government of India permits 100 per cent foreign direct investment
(FDI) in its education sector under the automatic route of approval.

 According to the Department for Promotion of Industry and Internal Trade

(DPIIT), the total amount of Foreign Direct Investment (FDI) inflow into
the education sector in India stood at USD 2.47 billion from April 2000 to
March 2019.

 The sector is expected to reach US$ 1.96 billion by 2021 with around 9.5
million users.

 The country has become the second largest market for e-learning after the
US.

Railway Sector-

100 % Foreign Direct Investment In The Railway Sector is allowed under

automatic route for operation and maintenance of suburban corridor projects
through PPP, including a 100% FDI in Railways infrastructure.
  $1.22 bn FDI inflows (in USD) in railway components during April 2000
– June 2019.

World Investment Report 2021- UN

Trends by geography (p.4-6)

- Developing Asia, already the largest FDI recipient region accounting for more
than half of global FDI – registered a rise of 4 per cent to $535 billion.

- However, excluding sizeable conduit flows to Hong Kong, China, flows to the
region were down 6 per cent

FDI in South-East Asia – normally an engine of growth for global FDI –

contracted by 25 per cent to $136 billion, with

It declines in investment in all the largest recipients including,

Singapore (-21 per cent),

Indonesia (-22 per cent) and

Viet Nam (-2 per cent)

Trends by type and sector

- The pandemic had a sizeable impact across all types of FDI in 2020, affecting
investment in all regions and industries

- International project finance volumes were also affected – declining by 42 per

cent

a. Greenfield investment trends

- The value of announced greenfield investment projects fell to $564 billion in

2020 (table I.2), the lowest level ever recorded.
- The geographical focus of foreign investors shifted to developed economies.
Consequently, developing countries faced an unprecedented downturn in
greenfield FDI projects.

The energy price shock early in 2020 also affected resource-based processing
industries,

TSMC (Taiwan Province of China) announced an investment of $12 billion in a

chip factory in the United States.

Announcements of battery investments included $5.1 billion by Contemporary

Amperex Technology (China) in Indonesia,

$2.3 billion by Honeycomb Energy Technology (China) in Germany and $2.2

billion by Groupe PSA (France), also in Germany.

B) International project finance trends- it is less affected by Covid 19

The COVID-19 crisis caused a dramatic fall in foreign direct investment (FDI) in
2020.

Global FDI flows dropped by 35 per cent to $1 trillion, from $1.5 trillion in 2019.

This is almost 20 per cent below the 2009 trough after the global financial crisis.

The decline was heavily skewed towards developed economies, where FDI fell
by 58 per cent, in part due to oscillations caused by corporate transactions and
intrafirm financial flows.

FDI in developing economies decreased by a more moderate 8 per cent, mainly

because of resilient flows in Asia.

As a result, developing economies accounted for two thirds of global FDI, up

from just under half in 2019
In developing countries, the number of newly announced greenfield projects fell
by 42 per cent and the number of international project finance deals – important
for infrastructure – by 14 per cent

FDI inflow (p.48)

FDI inflows to developing Asia grew by 4 per cent to $535 billion in 2020,
increasing Asia’s share of global inflows to 54 per cent.

the value of announced greenfield investments in 2020 contracted, and the

number of international project finance deals stagnated

FDI inflows, top 20 host economies, 2019 and 2020

1) US, 2 China, 3) Singapore 5) Honkong Chian, 8) India

FDI in China and India

- China's economy has been benefited from FDI. targeting the nation's high-tech
manufacturing and services

In China and India, FDI increased by 6 per cent (to $149 billion) and 27 per cent
(to $64 billion), respectively in 2020.

FDI in India 2021

The Ministry of Commerce and Industry has announced that India’s FDI
inflows during the period April-July 2021 rose to US$ 20.42 billion, marking a
112% year-on-year increase. Corresponding to the previous year, FDI inflows
were documented at US$ 9.61 billion.

In terms of sector-wise contribution, the Automobile sector leads the way with a
23% share,

closely followed by the Computer Hardware and Software space with an 18%
share
and the Services sector with a 10% share.

In terms of State-wise performances, Karnataka contributed to 45% of the total

inflow with Maharashtra and Delhi following with 23% and 12% respectively. In
the Ministry’s view, the investment facilitation policies and FDI reforms ushered
in by the Government have enabled the growth in investment.

FDI inflows were documented at US$ 6.24 billion in April 2021, marking a 38%
year-on-year increase. The growth was bolstered by the performance of the
Services sector, Education sector and the Computer Hardware and Software
sectors. At that time, Mauritius contributed 24% of the total incoming
investments, Singapore 21% and Japan 11% of the total inflows. The World
Investment Report 2021 prepared by the United Nations Conference on Trade
and Development (UNCTAD) documents India’s position as the fifth-largest
recipient of FDI inflows at a global level. Experts observe that the development
of the infrastructure sector and further streamlining of the regulatory ecosystem
can contribute to the increase in FDI inflows.

2) Foreign portfolio investment (FPI)

- FPI refers to the purchase of securities and other financial assets by
investors from another country. Examples of foreign portfolio investments
include stocks, bonds, mutual funds, exchange traded funds, American
depositary receipts (ADRs), and global depositary receipts (GDRs)

Difference Between FDI and FPI

- Foreign portfolio investment is the purchase of securities of foreign countries,
such as stocks and bonds, on an exchange.

Whereas, FDI is building or purchasing businesses and their associated

infrastructure in a foreign country.
- FDI is seen as a long-term investment in the country's economy, while portfolio
investment can be viewed as a short-term move to make money.

- FDI is likely only suitable for large corporations, institutions, and private equity
investors. FPI investment is mainly listed companies while FDI can be made in
listed as well as unlisted companies

FII or Foreign Institutional Investor is an investment made by an investor in the

markets of a foreign nation.

- In FII, the companies only need to get registered in the stock exchange to make
investments.
- The Foreign Institutional Investor is also known as hot money as the investors
have the liberty to sell it and take it back. But in Foreign Direct Investment, this
is not possible.

- FII can enter the stock market easily and also withdraw from it easily.

FPI or FII is highly volatile –

Its depends on interest rate of country, political stability, developing economy

Benefits of Foreign Portfolio Investment

II for Investors-

Investment Diversity

FPI provides investors an opportunity to diversify their portfolio. As an investor,

you can diversify your portfolio to achieve high returns.

International Credit
Investors can get access to increased amounts of credit in foreign countries. They
can broaden their credit base

High Liquidity

Foreign Portfolio Investments provides high liquidity. An investor can buy and
sell foreign portfolios seamlessly.

Exchange Rate Benefit

An investor can leverage the dynamic nature of international currencies. Some

currencies can drastically rise or fall, and a strong currency can be used in
investor’s favour

For country

Large foreign capital will be available-

It helps for economic growth-

Foreign reserve-

Categories in Foreign Portfolio Investment

One can register FPI in one of the below categories:

Category I: This includes investors from the Government sector. Such as central
banks, Governmental agencies, and international or multilateral organizations or
agencies.

Category II: This category includes: Regulated broad-based funds such as

mutual funds, investment trusts, insurance/reinsurance companies.

Also include regulated banks, asset management companies, portfolio managers,

investment advisors, and managers.
Category III: It includes those who are not eligible in the first two categories. It
includes endowments, charitable societies, charitable trusts, foundations,
corporate bodies, trusts, individuals.

3) American depositary receipts (ADRs)

What is ADR?

What is wall street?

Wall Street is literally a street located in New York City

Wall Street has been the historic headquarters of some of the largest U.S.
brokerages and investment banks and is also the home of the New York Stock
Exchange.

- This connotation has its roots in the fact that so many brokerages
and investment banks historically have established HQs in and around the street,
all the better to be close to the New York Stock Exchange (NYSE).

The term ADR refers to a negotiable certificate issued by a U.S. depositary bank
representing a specified number of shares—usually one share—of a foreign
company's stock.

The ADR trades on U.S. stock markets as any domestic shares would. ADRs
offer U.S. investors a way to purchase stock in overseas companies that would
not otherwise be available.

Foreign firms also benefit, as ADRs enable them to attract American investors
and capital without the difficulty and expense of listing on U.S. stock exchanges
(Such as ICICI, HDFC etc.)

- ADRs are denominated in U.S. dollars. The underlying security is held by a

U.S. financial institution, often by an overseas branch.
- ADR holders do not have to transact the trade in the foreign currency or worry
about exchanging currency on the forex market. These securities are priced and
traded in dollars and cleared through U.S. settlement systems.

- In order to begin offering ADRs, a U.S. bank must purchase shares on a foreign
exchange. The bank holds the stock as inventory and issues an ADR for domestic
trading. ADRs list on either the New York Stock Exchange (NYSE) or the
Nasdaq, but they are also sold over-the-counter (OTC).

Major functions of ADR

- An American depositary receipt is a certificate issued by a U.S. bank that
represents shares in foreign stock.

- These certificates trade on American stock exchanges.

- ADRs and their dividends are priced in U.S. dollars.

- ADRs represent an easy, liquid way for U.S. investors to own foreign stocks.

- These investments may open investors up to double taxation and there are a
limited number of options available.

4) Global depositary receipts (GDRs)

- GDR is a bank certificate issued in more than one country for shares in a foreign
company.

- It is very similar to an ADR, except an ADR only lists shares of a foreign

country in the U.S. markets.

- GDRs typically trade on American stock exchanges as well as Eurozone or

Asian exchanges.

- GDRs list shares in two or more markets, most frequently the U.S. market and
the Euromarkets, with one fungible security.
- GDRs are most commonly used when the issuer is raising capital in the local
market as well as in the international and US markets, either through private
placement or public stock offerings.

- GDRs and their dividends are priced in the local currency of the exchanges
where the shares are traded.

- GDRs represent an easy, liquid way for U.S. and international investors to own
foreign stocks.

- The shares themselves trade as domestic shares, but, globally, various bank
branches offer the shares for sale.

- Private markets use GDRs to raise capital denominated in either U.S. dollars or
euros. When private markets attempt to obtain euros instead of U.S. dollars,
GDRs are referred to as EDRs.

- Investors trade GDRs in multiple markets, as they are considered to be

negotiable certificates. Investors use capital markets to facilitate the trade
of long-term debt instruments and for the purpose of generating capital. GDR
transactions in the international market tend to have lower associated costs than
some other mechanisms that investors use to trade in foreign securities.

5 Public foreign investment

1) Sovereign Wealth Fund-

A sovereign (independent) wealth fund is a state-owned investment fund
comprised of money generated by the government, often derived from a
country's surplus reserves, taxation from the FDI, privatisation or
disinvestment

A sovereign wealth fund, sovereign investment fund, or social wealth fund is a

state-owned investment fund that invests in real and financial assets such as
stocks, bonds, real estate, precious metals, or in alternative investments such as
private equity fund or hedge funds.

As per the global SWF (April 2022), there are 200 SWF in the world

Objective

- SWF’s primary objective is to generate good returns over a long-term duration.

- SWFs are formed with the intent to protect and stabilise the budget and economy
at times when the revenues and exports are excessively volatile.

- The SWFs ensure the long-term growth of the capital and diversifying the export
of non-renewable commodities.

- Sovereign wealth funds invest globally. Most SWFs are funded by revenues
from commodity exports or from foreign-exchange reserves held by the central
bank.

Some SWF be held by a central bank, which accumulates the funds in the course
of its management of a nation's banking system; this type of fund is usually of
major economic and fiscal importance.

The accumulated funds may have their origin in, or may represent, foreign
currency deposits, gold, special drawing rights (SDRs) and International
Monetary Fund (IMF) reserve positions held by central banks and monetary
authorities, along with other national assets such as pension investments, oil
funds, or other industrial and financial holdings.

These are assets of the sovereign nations that are typically held in domestic and
different reserve currencies (such as the dollar, euro, pound, and yen).
Such investment management entities may be set up as official investment
companies, state pension funds, or sovereign (independent) funds, among others.
There have been attempts to distinguish funds held by sovereign entities from
foreign-exchange reserves held by central banks. Sovereign wealth funds can be
characterized as maximizing long-term return, with foreign exchange reserves
serving short-term "currency stabilization", and liquidity management.

Currently, 49 countries have state-owned SWF.

Singapore’s Government Investment Corporation (GIC) is known to be the first

SWF; it was established in the year 1981. However,

The term "sovereign wealth fund" was first used in 2005 by Andrew Rozanov in
an article entitled, "Who holds the wealth of nations?" in the Central Banking
Journal.

SWF in India –
What is PPF and SWF?

The most crucial and obvious difference between them though, is that PPFs have
an explicit stream of pension liabilities, and SWFs do not. Together, we refer
to both groups as State-Owned Investors (SOIs), Sovereign Investors, or
Sovereign Funds.

1) Employees Provident Fund Organization (EPFO) (source global SWF)

It is public provident fund (ppf)

established in 1952, is the social security institution under the jurisdiction of the
Ministry of Labor and Employment of India. The EPFO is responsible for the
regulation of the provident funds, and administers the Employees’ Provident
Fund, the Employees’ Pension Scheme, and the Employees’ Deposit Linked
Insurance Scheme. The EPFO manages US$ 169 billion.

National Pension System Trust (NPST)

It is ppf
was established by Pension Fund Regulatory and Development Authority
(PFRDA) as per the provisions of the Indian Trusts Act of 1882 for taking care
of the assets and funds under the NPS in the best interest of the subscribers. It had
US$ 88 billion in assets under management, was US$ 88 billion end the of fiscal
year 2021, most of it in public sector pension funds.

2) National Infrastructure Investment Fund (NIIF)

NIIF is a manager that solely invests in Indian infrastructure.

NIIF is India's first infrastructure specific investment fund or a sovereign wealth

fund that was set up by the Government of India in February 2015. (reference
Budget 2020)

The major purpose behind creating this fund was to maximize economic impact
mainly through infrastructure investment in commercially viable projects,
both greenfield and brownfield

Mission

“To invest in infrastructure assets and related businesses that are likely to benefit
from the long-term growth trajectory of the Indian economy” (Sovereign
Development Fund)

The Indian government has 49% stake in NIIF with the rest held by marquee
foreign and domestic investors and multilaterals, including ADIA, Temasek,
OTPP, AustralianSuper and AIIB. NIIF is structured in three different funds:
Master Fund (the largest infrastructure fund in India), Fund of Funds, and
Strategic Fund. The fundraising and objectives of each of the funds is different,
but the NIIF team is the same.

In Union Budget 2015-16, India’s Finance Minister, Arun Jaitley announced the
creation of National Investment and Infrastructure Fund. It was proposed to be
established as an Alternative Investment Fund to provide long tenor capital for
infrastructure projects with an inflow of Rs. 20,000 crore from the Government
of India.

NIIF was approved in August 2015 by the Department of Economic Affairs.

First meeting of its governing council was held in December 2015 further to
which it was registered with SEBI as Category II Alternative Investment Fund

As of September 2020, the NIIF manages funds of over US$4.4 billion (reference
Economics times)

(i) Foreign Aid- Tied and untied

Tied aid and Untied-aid (As per the OECD)

Tied aid describes official grants or loans that limit procurement to companies in
the donor country or in a small group of countries.

Tied aid is foreign aid that must be spent on products & services provided by
companies that are from the country providing the aid.

- Tied aid therefore often prevents recipient countries from receiving good value
for money for services, goods, or works.

- United States supplying wheat to underdeveloped world is an example of this

aid

Untied aid – removing the legal and regulatory barriers to open competition for
aid funded procurement – generally increases aid effectiveness by reducing
transaction costs and improving the ability of recipient countries to set their own
course.

It also allows donors to take greater care in aligning their aid programmes with
the objectives and financial management systems of recipient countries.
Untied aid puts more restriction on the donor nation's ability to spend external aid

From 1999-2001 to 2008, the proportion of untied bilateral aid rose progressively
from 46% to 82%.

6 Human Capital and Human Capital Index (HCI).

HCI first introduced in world Development report 2019.

World Development Report 2019, Investing in human capital is the priority to

make the most of this evolving economic opportunity.

Three types of skills are increasingly important in labour markets (p.3)

1) advanced cognitive (intellectual) skills such as complex problem-solving,

2) socio-behavioral skills such as teamwork, and

3) skill combinations that are predictive of adaptability such as reasoning and

self-efficacy.

Self-efficacy?

This concept originally proposed by the psychologist Albert Bandura, refers to

an individual's belief in their capacity to execute behaviors necessary to produce
specific performance attainments.

Self-efficacy affects every area of human endeavour (adventure).

Building these skills requires strong human capital foundations and lifelong
learning.

The foundations of human capital, created in early childhood, have thus become
more important. Yet governments in developing countries do not give priority to
early childhood development, and the human capital outcomes of basic schooling
are suboptimal.
The World Bank’s new human capital index, presented in this study for the first
time, highlights the link between investments in health and education and the
productivity of future workers.

Changing nature of work for human capital (p.5)

A) Effects of technology- 1 Changing skills, 2) New business models

B) Public policy: - manage the direction and effects of change- 1) Invest in

human capital, 2) Strengthen social protection, 3) Mobilize revenue

c) Social inclusion- Elective service provision, fair taxation regulation, voice

d) Goal - Prepared people, competitive markets, new social contract

Methodology - human capital index calculation

The human capital index quantifies the milestones in this trajectory in terms of
their consequences for the productivity of the next generation of workers

The Index is grounded on the following three pillars

Survival

 Share of children surviving past the age of 5 in %

- A measure of whether children survive from birth to school age (age 5)

A basic level of human capital, such as literacy and numeracy, is needed for
economic survival

School

 Quantity of education (Expected years of schooling by age 18)

 Quality of education (Harmonized test scores)

Health

 Adult survival rates (Share of 15-year-olds who survive until age 60 in %)

  Healthy growth among children (Stunting rates of children under 5 in %)

What can governments do?

1) Investing in human capital, particularly early childhood education, to develop

high-order cognitive and sociobehavioral skills in addition to foundational skills.

2)Enhancing social protection. A solid guaranteed social minimum and

strengthened social insurance, complemented by reforms in labor market rules in
some emerging economies, would achieve this goal.

3) Creating fiscal space for public financing of human capital development and
social protection. Property taxes in large cities, excise taxes on sugar or tobacco,
and carbon taxes are among the ways to increase a government’s revenue

As per this report 2019, Tax revenues are lower in developing countries than
developed countries.

It is low in low income country, medium in middle income country and high in
high income country in since 1980 to 2018

Building human capital (chapter 3, p 50)

The world is healthier and more educated than ever.

In 1980 only 5 in 10 primary school-age children in low-income countries were

enrolled in school. By 2015 this number had increased to 8 in 10.

In 1980 only 84 of 100 children reached their fifth birthday, compared with 94 of
100 in 2018.

A child born in the developing world in 1980 could expect to live for 52 years. In
2018 this number was 65 years.

Human capital index (HCI), 2018, (p.62)

India rank 115, HCI 0.44
Shri Lank 74, HCI 0.58,

China- 46, HCI 0.67

Singapore 1, HCI 0.88

As per the world development report published by World Bank (2021), Investing
in people Building the skills of analysts and decision-makers.

Leveraging the comparative advantages of public intent and private intent data
requires a long-term approach to enhancing domestic human capital in lower-
income countries.

Without skilled human resources, countries will be limited in their ability to apply
modern data infrastructure to achieving economic and social impacts.