BW Communities

RBI Questions Services-Led Growth Model

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Reserve Bank Governor D Subbarao warned on Monday that the country will not be able to cash in on the demographic dividends if the economy continues its job-less growth pattern for far too long. Stating that now questions are being asked whether the model of services-led growth is sustainable, the Governor said the services sector cannot be the sole engine of growth. Referring to the boastful talk about the huge demographic dividend, Subbarao said, "We forget the most important thing-- demographic dividend is not inevitable. To reap the demographic dividend, we need to find jobs for the 150-200 million people who will be thrown out of the farm sector (in the near future)." The Governor was speaking while releasing a developmental report prepared by the city-based research agency Indira Gandhi Institute of Development Research, at the RBI headquarters. Though the services-led growth has steamed our economy so far, we cannot depend on it to drive growth from here on, he pointed out. "The services sector may have been an autonomous engine of growth for the last 20 years, but going forward, it cannot be an engine of growth like it has been. We cannot depend on it to drive our growth. We need to focus on manufacturing and, importantly on agriculture too, for sustainable growth," Subbarao said. The share of the services sector in the $1.7-trillion GDP has gone up to 65 per cent last fiscal, up from about 50 per cent in 1991, when the economic liberalisation bandwagon started rolling. The contribution of services sector to GDP growth is still higher at 70 per cent, the Governor said. Explaining why a services sector-led growth is not sustainable, Subbarao said this sector has very strong forward linkages but weak backward linkages and hence low employment generation potential. Another inherent drawback of the current model of growth is that the services sector cannot find so many productive jobs especially when skill endowment is relatively low, he said. "Therefore, we need to focus on manufacturing sector for generating jobs that we need," he said. Talking about the importance of the external sector and the need for rupee float, the Governor said "we need a calibrated approach to capital account convertibility and of course, we need foreign exchange reserves sufficient to buffer against the uncertainties," Capital account convertibility has been a widely debated issue wherein some pro-liberalisation voices have been asking for a full convertibility rather than the present system where the monetary authority caps it for individuals and corporates separately. The RBI has been steadily increasing the limits and has relaxed it to a level that is adequate for individuals, but not so for corporates which have been demanding full float of the domestic currency. Stressing that the external sector with its increasing contribution to the GDP is very important, Subbarao underlined the need for keeping the current account deficit at a "sustainable level", even while maintaining a market determined exchange rate which does not "militate" against the macroeconomic stability. (PTI)