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RBI puts 99-00 GDP growth at 6.5 pc; service sector accounts for more than half of GDP

The Reserve Bank of India has placed the real growth rate of gross domestic product at 6 to 6.5 per cent for the current fiscal year 1999-2000.

Going by the latest indications in agricultural and industrial sectors, the growth rate will be in line with the average growth recorded in five years between 1994-95 and 1998-99.

In its annual report for the year 1998-99, the RBI said that there were clear signs of improved economic prospects. Stability reflects the gains from adoption of prudent and carefully designed macroeconomic policies in recent years.

If the industrial recovery in the first three months is any indication, industrial production should increase at the rate averaged in the last four years of about 7 per cent.

Foodgrains production crossed the 200 million tonne mark for the first time in the Indian economic history and the buffer stocks of foodgrains stood at around 33 million tonnes at end-June 1999, which is considered to be higher than the stated norms from the point of view of food security.

Exports have shown some signs of a rebound in the first three months of the current year while import bill is likely to grow under the impact of oil price increases.

Inward remittances continue to be buoyant and capital flows have been at a reasonable level to bridge the gap in the current account deficit.

The inflation rate during the year is likely to remain low at around 2 to 3 per cent and much below the long-term trend, which was about 8.5 per cent a year for the past three decades.

The monetary growth remained close to its long run rate of about 17 per cent and therefore, the current inflation rate seems to have diverged significantly from its long-term trend.

Emphasising the need to keep the growth in expenditure within the budgeted limits, the RBI annual report said that the revenue deficit in 1998-99 amounted to Rs 1.01 trillion, up by about 61 per cent over the position in the previous year.

Such a high order of deficit can not be sustained for long, even if the country's real GDP grows at an average of 6 to 6.5 per cent annually in the coming years.

The huge deficit would require a large mobilisation of revenue receipts which, given the rising share of relatively under-taxed services sector, can not grow without bringing about sharp changes in tax structure and efficiency in tax collections.

It would imply a large reliance on market borrowings, putting pressure on market rates of interest and crowding out private initiatives, the report said.

As the growth scenario during the year was dominated by deceleration in the industrial activity and continued deterioration in net external demand, the report said that a part of the increase in fiscal deficit was due to the decline in the tax revenue in response to the slowdown in industrial activity and import growth.

Further, the growth in services sector did not contribute adequately to the revenue earnings of the government since the sector is not effectively brought under the tax base.

The RBI has felt that the services sector of the industry should be brought under a single integrated tax system such as the value added tax.

The RBI said that the share of services including construction activities in real gross domestic products increased from 43.7 per cent to 51.2 per cent. The contribution of growth of the services sector to the overall growth of the gdp has also increased from 47.5 per cent in 1990-91 to 49.8 per cent in 1998-99.

However, such growth in services sector did not contribute to the revenue earnings of the government since this sector is not effectively brought under the tax base. A rising share of services in the GDP could result in lower growth of revenue to the government unless the indirect tax system is integrated under a single tax system, the report observed.

A relatively high growth of the services sector would be generally suggestive of gains in productivity in agricultural and industrial sectors induced by technological progress and other innovations which result in moving employment away from the non-services sector to the services producing sector.

It also indicated a shift of real expenditure from manufacturing to value added services which is generally associated with the process of economic development. While the rising share of the services sector in GDP is an encouraging sign of greater degree of diversification of the Indian economy, a corresponding decline in the share of industry and agriculture implied that the overall productivity gains in the economy would depend increasingly on the services sector.

While a large part of the services output continues to be non-tradeable in nature, the report emphasised the need for policy initiatives towards introducing greater competition and efficiency in the services sector for ensuring its sustained contribution to high long-term growth which could be a high potential tax-base for the government in future.

UNI

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The RBI's Annual Report

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