India cannot depend on services to drive growth: D Subbarao

12 Jul 2011 Evaluate

India’s growth in the international arena has been mostly led by the services sector, for the last two decades, but now questions are being asked whether this model of services growth is sustainable. India cannot depend on service sector alone to drive growth, said RBI governor D Subbarao at an event after the release of the India Development Report 2011.

According to the India Development Report, economic sustainability is in doubt because of issues like stagnation in agriculture, marginal growth in the manufacturing sector post the reforms and doubts about the sustainability of services-led growth in the context of weak linkage with the farm sector.

India has been contrarian because both in terms of share of GDP and contribution to GDP services have seen a huge increase. The share of services sector has increased to 65 from 50 per cent in 1991, while the contribution to growth of services sector is over 70 per cent. However, RBI studies show that services sector has very strong forward linkages but relatively weak backward linkages. Which means services sector cannot be an engine of growth going ahead. It cannot sustain growth. We need to focus on manufacturing and, importantly, agriculture for employment purposes for sustainable growth, Subbarao said.

D Subbarao also stressed upon RBI's need to focus on external factors for sustained growth momentum. Some of them include maintaining sustainable level of current account deficit, market-determined exchange rate and a calibrated approach to capital account convertibility and ample foreign reserves to buffer against uncertainties.

Subbarao also listed the growing global integration of India as one of the five mega trends in the last 20 years of reforms. In 1990-91 the ratio of imports and exports to GDP was 15 per cent, went up to 22 per cent in 2001 and 37 per cent in 2011, in a matter of 20 years. The two-way current and capital flows have moved from 32 per cent in 1991, to 56 per cent in 2001 and 108 per cent in 2010-11. That's moved much faster. “Our total trade and financial integration have been much deeper and faster. We need to focus on external sector,” he added.

Another mega trend is the shift in the terms of trade from urban industrial and services sector to traditional rural agriculture sector, due to the rise in support prices in agriculture. If the terms of trade are shifting there can be implications for growth. If demand in rural areas is growing and if incomes are going up, it can have implications for inflation, Subbarao said.

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