Economists debate financial sector in India and China

The IMF/World Bank Annual Meetings Program of Seminars here in Singapore kicked off Saturday morning with "Opening and Reforming the Financial Sectors in China and India" - a provocative session packed with economic heavy hitters. Not surprisingly, despite probing questions neither Zhou Xiaochuan, Governor of the People's Bank of China, nor Ashok Lahiri, Chief Economic Adviser for the Indian Ministry of Finance, would commit to a timetable for greater exchange rate flexibility. Larry Summers argued that fundamental forces would drive currency appreciation and greater exchange rate flexibility in both countries.  In a call to look at economic history, Summers suggested that it is 10 times more common to abandon a fixed rate regime too late than too early.

Entering the dangerous game of economic predictions, Mr. Summers also suggested that in five years India and China's capital markets would be much more integrated with the world economy, reserve accumulation would no longer be tenable, and both countries would move towards structural current account deficits.

As moderator Stanley Fischer noted, several panelists highlighted one issue crucial to both countries - the need to improve credit access for rural areas and small and medium enterprises (SMEs).  Even with rapid urbanization, over two-thirds of the populations in both India and China still live in rural areas and have very limited access to credit and the range of financial services. For example, in India, the 10 largest centers account for 80% of bank deposits and advances.  Barry Eichengreen observed that it is important to "step up the pace of commercialization" in the banking sector and improve credit for the agricultural sector and SMEs in both countries. SMEs are the centers of innovation in an economy and critical to continued business growth in the emerging Asian giants.