Reserve Bank of India governor Y.V. Reddy has quite correctly reiterated a few reasons why India must not rush into setting up a sovereign wealth fund. With foreign exchange reserves in excess of $300 billion (Rs12 trillion), there is always talk of using the hoard to buy assets abroad. Many believe that India would do well to emulate China and the West Asian countries in this regard.
There are two important differences between India and the countries that have set up sovereign wealth funds. One, some of these countries have excess savings and, hence, current account surpluses. Domestic savings are more than domestic investment; these can be invested abroad. Two, other nations have natural resources, such as oil, that have led to huge revenues. This money is used abroad. In a way, wealth under the ground is transformed into wealth above the ground.
India has current account and fiscal deficits. It is a net importer of oil. In these circumstances, a sovereign wealth fund is a bad idea.