The Indian economy has been growing at a breakneck pace in recent years. However, the country is in serious need of financial reforms to make that growth sustainable and inclusive, explains Cornell professor Eswar Prasad, the Nandlal P. Tolani Senior Professor of Trade Policy in the Department of Applied Economics and Management, and an adviser to the Indian government. Before coming to Cornell, he was the head of the International Monetary Fund's Financial Studies Division.

A country's financial system -- including its banks, stock markets, government and corporate bond markets -- is a key part of the engine that drives the economy's growth. For an emerging market economy like India, a well-functioning financial system could spell the difference between low and volatile growth on the one hand, and high, stable and equitable growth on the other. While India's financial system has improved over the years, the demands placed on it have multiplied as the Indian economy has become richer, more complex and more integrated into the world economy.

Last August, the Indian government set up a high-level committee, chaired by the former chief economist of the International Monetary Fund (Raghuram Rajan) and including India's top bankers, financial regulators and academics, to articulate a vision for the next generation of financial reforms for India.

I was on the research team for the committee and was responsible for drafting the chapter on macroeconomic policies. What do monetary, exchange rate and fiscal policies have to do with the financial system? Therein lies a tale.

This committee was given the freedom to paint on a broad canvas. Its mandate was to "outline a comprehensive agenda for the evolution of the financial sector." The committee rightly decided that it would have to take a holistic perspective, including thinking about the right macro policies that could serve as a foundation for financial reforms. For instance, good monetary policy -- and the resulting confidence that a central bank will keep a tight leash on inflation -- is essential for people to enter into long-term contracts and participate in markets for long-term bonds.

The committee's composition seemed primed for conflict, considering that it put together heads of the leading private- and public-sector banks together discussing how the government should reform public-sector banks and make them more subject to market discipline. Remarkably, despite the inevitable differences in views, the committee succeeded in reaching consensus on a sharp set of recommendations. This is a testament to the strong desire of all committee members to push for significant financial reforms, even if they disagreed on some specifics.

The report (http://planningcommission.nic.in/reports/genrep/report_fr.htm), which was released this month, lays out a blueprint for the next generation of financial sector reforms in India. It contains a broad vision for strengthening the banking system, building up government and corporate debt markets, improving regulation and supervision of the financial system and promoting financial innovation. More importantly, it shows how these different elements are intertwined and argues that putting in place some of these reforms simultaneously, rather than in a piecemeal manner, may in fact be easier and potentially more effective.

A robust financial system is not much good, however, if most people don't have access to it. The lack of access to formal banking services, which affects more than one-third of poor households, leaves them vulnerable to moneylenders. And the lack of financing nips entrepreneurial desires in the bud. The report highlights that financial inclusion is a key priority for India, especially rural India. This means providing not just basic banking but also instruments to insure against such adverse events as low crop yields due to bad weather.

There is a risk that India's rich and complex political process could stall the implementation of the broad vision in the report. Hence, the report also contains specific smaller steps to build up some momentum for reforms as people see the benefits. For instance, something as simple as converting trade receivable claims to electronic format and creating a structure allowing them to be traded in a secondary market could greatly boost the credit available to small and medium-sized enterprises

The report has already generated strong reactions, and members of the committee, including myself, have been busy writing articles in the major Indian newspapers summarizing the arguments in the report and rebutting our critics.

Even if we change the terms of the debate among Indian policymakers and the public, something will have been accomplished. But it is the committee's fervent hope that the report will achieve a lot more; we will have to wait and see what the government does with it.

To the committee, the choice is clear. The implementation of our report's blueprint for financial sector reforms could lay a strong foundation for India's future economic growth and also contribute to the social and political sustainability of that growth. The absence of reforms, on the other hand, would represent a lost opportunity and perhaps also a huge source of risk for the economy.