What are Stabilization Funds?
Countries which are endowed with natural resources like oil, gas, minerals etc. have huge revenue inflows which give them as many options to use them for development and growth. These countries have a windfall of funds which are used to attain a sustainable economic growth and invest in populist measures like promotion of education of infrastructure development. The flip side of the coin is that these revenues are highly volatile and dependent on international markets. The economies completely dependent on them are more prone to economic instability caused by so-called Dutch disease. (Dutch disease is basically a situation where huge incomes from natural resources trigger higher real interest rates and significantly weakens the competitiveness of domestic tradable factors). This also leads to Voracity Effect which means booming economic situation resulting in disproportionate and discretionary expenditure. The latter at times also means transfer to private sector which in turn doesn’t contribute much to the overall growth. All this considerably reduces the competitiveness of domestic trade. As a result the non-resource linked current account deteriorates, thus exposing the economies to price shocks and sharp declines in prices.
A Stabilization fund is a fiscal instrument employed by countries of oil-rich (natural resource-rich) nations to ride against any economic shocks caused by international fluctuations in resource prices and related revenues. It is a sum of revenues which is kept aside by economies to smoothen public expenditures and consumptions during period of growth and stability. These funds provide stability in times of economic turmoil and contractions thus keeping the economy afloat. The efficiency of these funds to provide a cushion against any economic shocks is under scanner. It has been concluded by experts that the instrument alone if resorted is not sufficient to tide over adversities. The economy has to be properly buffered and well-prepared by setting clear regulations on asset management, design, transparent and accountable institutional arrangement. It has been also found that formation and maintenance of Stabilization funds is not essential. It has been seen that government expenditures are relatively less volatile in countries with these funds. The relation between presence of stabilization funds and spending volatility is in inverse proportion.
Also, there are many other factors which come into play to decide the volatility. It is also known as ‘the rainy day’ fund and countries usually allocate 10 percent of their budgets to this. A majority in legislative bodies of the country is required to appropriate funds for this.
Indian economy is not dependent on natural resources and thus Government of India decided to form a morphed version namely National Investment Fund. NIF was constituted in 2005 when it was kept aside from Consolidated Fund of India. It was in 2013, the fund was given place in public account and was to be used for specific purposes.