Concerned over falling growth, RBI today asked the government to provide investment stimulus and take aggressive steps, like increasing petroleum prices, to curtail subsidies.
"Corporate sales decelerated along with continued decline in profits and could adversely impact investments ahead.
"In this situation, crowding-in of private investment demand by public investment spending stimulus while aggressively cutting expenditure on subsidies hold the key to growth revival," the RBI said in Macroeconomic and Monetary Developments report.
Citing that low investments cannot be attributed to high interest rates only, the RBI said in the pre-crisis period investments were high even as interest rates remained at elevated level.
It said sustained fall in investment has impacted India's growth potential and there is a need to improve the investment climate by "moving quickly" to address bottlenecks in infrastructure space and removing constraints on foreign direct investment (FDI).
India's economic growth fell to a nine-year low of 6.5% in 2011-12 after clocking over 8% GDP growth for three consecutive fiscals.
Government has been unable to raise FDI cap in insurance and pension sector to 49% from 26% and also open the multi-brand retail sector to foreign players because of opposition from its coalition partners.
RBI further said it was not possible for the government to provide any fiscal sops to the industry as was given at the time of 2008 crisis.
Pointing out that high deficit could further impact weak private investment demand, RBI said, "it is critical to return to a credible and durable fiscal consolidation path.
"As such, fiscal space would need to be created by controlling revenue expenditure to provide more resources for capital expenditure which could crowd-in private investment," the apex bank said.
It said there was a need for curtailing subsidies and the government should take "steps to allow pass-through of international crude oil prices to domestic prices, failing which it would be difficult to achieve the deficit target".
Fiscal deficit, which is the gap between the revenue and expenditure, had ballooned to 5.76% in 2011-12, from 4.9% a year ago. The government targets to bring it down to 5.1% in the current fiscal.
RBI said the budgeted petroleum subsidy of Rs 43,500 crore for the current fiscal "appears inadequate".
