The dynamic economies of China and India, two of the fastest-growing emerging market countries and among the three largest economies in Asia, are having far-reaching effects on the global economy through, for example, their impact on world trade, their demand for energy and other commodities, and their huge accumulation of foreign currency reserves. What does the future hold? How can each continue to grow and develop in a sustainable way? And what lessons can the two countries draw from each other’s experiences? A new book from the IMF, China and India: Learning from Each Other, attempts to address these questions.
From a practical perspective
The book’s authors—policymakers and practitioners—infuse analytical material with a strong dose of pragmatism and policy relevance. Reserve Bank of India Deputy Governor Rakesh Mohan discusses how the forces of globalization can complicate the challenges facing monetary policymakers in emerging economies such as China and India, and Governor Zhou Xiaochuan of the People’s Bank of China contrasts the growth of the services sector, including financial services, in China and India and weighs the importance (and difficulties) of developing this sector in China.
The book takes a particularly close look at some of the reforms that will be needed to secure sustainable development.
Banking sector reforms. According to Nachiket Mor, R. Chandrasekhar, and Diviya Wahi, many dimensions of India’s banking sector have improved, but further reforms are needed to strengthen the financial services infrastructure, reduce the cost of intermediation, and broaden access to financial services, especially in rural areas. Nicholas Hope and Fred Hu enumerate the priorities for Chinese banking reforms and assess the role that foreign strategic investors could play in the reform process. Luo Ping compares the efficacy of the regulatory structures and reform processes in both countries and suggests that the Indian experience may provide some useful lessons for Chinese policymakers.
Development of securities markets. In two separate studies, G.N. Bajpai and Narendra Jadhav catalogue the development of equity, corporate debt, and government securities markets in India and discuss how policy reforms have contributed to these outcomes. In an examination of China’s securities industry, Xinghai Fang, Ti Liu, and Donghui Shi argue that opening up the industry to both internal and external competition could play a crucial role in enhancing efficiency.
Domestic financial development and international financial integration. As Suman Bery and Kanhaiya Singh see it, international financial integration has some risks, but its potential to stimulate greater financial sector development and improve macroeconomic policy discipline in India outweighs the risks. And, although capital account liberalization could play an important role in China’s development, Eswar Prasad, Thomas Rumbaugh, and Qing Wang contend that undertaking further liberalization before allowing for greater exchange rate flexibility could pose some risks.
Macroeconomic policies and sustainable growth. Steven Dunaway and Annalisa Fedelino find that Chinese fiscal policy, with low levels of fiscal deficits and debt relative to GDP, has been prudent in recent years. The policy has been appropriately guided by a medium-term focus on fiscal consolidation to make room for financing contingent liabilities (including in the state-owned banking system) and rising spending pressures as the population ages. Arvinder Singh also examines the factors behind, and the implications of, labor mobility in China and India.
Scope for economic cooperation
Finally, Arvind Virmani contends that there is significant scope for trade between India and China; he explores the main barriers to realizing this potential. Nalin Surie compares and contrasts the development models that China and India have followed, picking out some important lessons from each country’s experience. The two countries, he says, face similar socioeconomic challenges, and effective cooperation between these two giants could have broader benefits for the Asia-Pacific region and the global economy.
Jahangir Aziz, Steven Dunaway, and Eswar Prasad
IMF Asia and Pacific and Research Departments
Copies of China and India: Learning from Each Other, edited by Jahangir Aziz, Steven Dunaway, and Eswar Prasad, are available for $35.00 each from IMF Publication Services. Please see page 324 for ordering details.