The central bank's annual report said that the growth of the services sector has long-run fiscal implications to the extent that it constitutes a potential tax base for the government. The share of the services sector between 1990-91 and 1998-99 in real GDP increased from 43.7 per cent to 51.2 per cent while the contribution of growth of the services sector to the overall growth of GDP has increased from 47.5 per cent in 1990-91 to 49.8 per cent in 1998-99.

"Under the present tax regime, the services sector is generally under-taxed as it 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 such as the VAT," thereport said.

The report has pointed out that a large part of the services output continues to be non-tradeable in nature and this along with a shift in employment would point to the need for policy initiatives. "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 implies that the overall productivity gains in the economy will depend increasingly on what happens in the services sector," the report said.