A message for the Lungiwala

A recent Business week article speaks of the surplus Forex reserve of India – USD 291 billion as on Sept 2008.
This huge reserve has been build based on years of paranoia about economic fluctuations and need of funds to stabilize the economy. However as per reports we are being too cautious – heres why –
According to IMF guidelines, the forex reserves of a country should be sufficient to meet 3-4 months of its import requirements. In India's case this import coverage is for 14 months.
Further, according to the Greenspan-Guidotti rule proposed by former Fed chief Alan Greenspan, the reserves should be no less than the short term debt liabilities of the country. India is secure by a large margin on this ground as well. Its short term debt totals to less than 15% of the reserves amount.
A case in the point is that before this financial crisis India had Forex reserves of USD 310 Billion. So the entire crisis and all the money used has dented Indian reserves by a mere USD 10 billion.

Regression model by economists suggest that accounting for uncertainities like –
capital account openness,
share of imports,
exchange rate flexibility,
Oil shooting to USD 200 /barrel
and even political stability
India has about USD 106 billion worth of excess reserves.
Currently this entire portfolio is held in US T-bills which fetch 4.5% return compare this with the current inflation we are actually earning negative returns. Now consider what other nations with far lesser reserves do (e.g. Norway) – they invest about 50% of surplus in Sovereign wealth funds (SWF). The average return of these wealth funds has been about 15%. However adjusting for economic shocks and current scenario assume we earn 10% i.e 5% more than current on USD 50 Billion (50% of surplus) we would earn an interest payment of USD 2.5 billion more.
This translated into Rs 12,500 crores. This amounts to ~ 5% of the Budgetary deficit and could fund a substantial portion of the budget deficit for any of the following
- Health and Family welfare – 15000 cr
- School education- ~ 17000 cr
- etc

If its really that simple I hope Lungiwala sees this!!!