China and India: Learning from Each Other--Reforms and Policies for Sustained Growth.

• Author: Aiyar, Swaminathan
• Position: Book review

China and India: Learning From Each Other--Reforms and Policies for Sustained Growth Jahangir Aziz, Steven Dunaway, and Eswar Prasad, eds. Washington: International Monetary Fund, 2006, 282 pp.

This book's title promises more than it delivers. It compiles presentations at a seminar in October 2005 organized by the International Monetary Fund, China Society for Banking and Finance, and the Stanford Center for International Development in Beijing. The book provides interesting insights into the Chinese and Indian experience in several areas: banking sector reforms, securities market development, domestic financial liberalization, international financial integration, fiscal dimensions of rapid growth, and Sino-Indian economic cooperation, but ultimately adds up to much less than a comprehensive look at what the two countries can learn from each other.

Zhou Xiaochuan, governor of the People's Bank of China, notes that household consumption in China accounts for only 40 percent of GDP, against 65 percent in India, and says this should be increased. What remains unanswered in this book is why consumption is so low in a poor country. The absence of economic security in old age in China is not a convincing explanation: lack of such security is common in all developing countries, which have low savings rates nevertheless. Zhou notes that services account for only 40.7 percent of China's GDP against 51 percent in India, and says China needs to do better. However, this ratio is a poor indicator of development: services are as high as 54 percent of GDP in sub-Saharan Africa. China's ratio of services to GDP is the lowest in the world, but this is an indicator of success rather than failure: it is a consequence of having the highest ratio of industrial output to GDP in the world (51 percent).

Six chapters in this book carry succinct accounts of reforms in banking and securities markets in the two countries. On most parameters, India has sounder banks and securities markets, thanks to reforms over the last 15 years. Indian banks have greatly reduced their gross ratio of nonperforming loans (NPLs) to 3 percent of advances, raised capital adequacy to above 11 percent, and are moving toward Basel-2 norms. Yet over 500 million rural Indians have no access to banks, and bank credit is less than 60 percent of GDP, less than half China's rate. So, India has much to learn from China in financial depth if not asset quality.

The chapter by Nicholas Hope (deputy...