OREANDA-NEWS. April 26, 2012. India's government is considering the formation of a strategic energy fund to help secure supplies of raw materials such as coal and crude oil to sustain the nation's economic expansion.

Such a fund likely would begin with USD 10 billion and would be India's first attempt at a government-backed investment vehicle—a model that has been used for years by other emerging-market nations including China and Singapore.

But the relatively small amount of initial capital also highlights the limitations that India faces in competing globally for assets with other, larger funds. China's sovereign-wealth fund, for instance, was launched in 2007 with USD 200 billion in capital.

India has become a large net importer of energy and its import tab is placing a severe strain on the government's finances. A strategic energy fund could help secure cheap fuel abroad. But India's meager foreign-exchange reserves— USD 293.141 billion as of April 14—prevent a massive investment.

Indeed, the proposed fund would not be funded just from government coffers but with money from state-run fuel retailers and other energy companies, according to a Finance Ministry official.

"We don't have enough foreign-exchange reserves and hence we are stressing contributions from companies, because after all these are the ones that are interested in buying foreign assets," the official said.

India's current-account deficit—or the difference between total exports and imports of goods and services—was estimated at nearly 4% of gross domestic product in year ended March 31, which also limits the government's chances of drawing down cash from foreign-exchange reserves.

Much remains to be done before the fund can be launched.

"It's a sexy idea," said Saumitra Chaudhury, a member of the Planning Commission, which serves as an internal government think tank. But he said several issues—such as how the fund would be managed, whether it could invest in assets without taking full control, and what assets it could pursue— still must be resolved.

"We must be able to facilitate preferential access [to energy assets] at preferential prices," said Mr. Chaudhury, who is also a member of the Prime Minister's Economic Advisory Council.

That won't be easy. China, which has some USD 3.3 trillion in foreign-exchange reserves, has far outpaced India in the quest for global energy assets, especially in Africa, where it often offers hefty infrastructure loans in return for discounted rates for raw materials.

ONGC, India's state-run oil explorer, has been trying to find new sources of oil and gas to increase India's overseas energy reserves. But it has also run afoul of China, which has repeatedly warned ONGC that its joint exploration plans with Vietnam in the South China Sea undermine China's sovereignty. India has maintained that its activities in the area are purely commercial and that sovereignty issues must be resolved peacefully.

However, a senior company executive of ONGC Videsh Ltd., the overseas investment arm of ONGC, said it may relinquish an offshore field known as Block 128 in Vietnam due to high exploration risks. The executive said the decision to relinquish the block was based on pure commercial reasons and doesn't signal bowing to Chinese pressure.