The Reserve Bank of India's Report on Currency and Finance, 2001-2002, released on Monday, blames high real interest rates, among other things, for the current industrial slowdown.

The report -- a stock taking effort by the central bank's department of economic analysis and policy on the decade of economic reforms -- says the reforms process has lost momentum and that growth has substantially slowed since 1997-98.

The report says the growth process has been stunted to some extent by global business cycles. But the major factors responsible for the slowdown are the loss in reform momentum and structural constraints such as inadequate infrastructure and the high cost of borrowed funds, it says.

It calls for an acceleration in corporate debt restructuring efforts and a shift from fixed to floating interest rates. For Indian companies, interest as a percentage of total cost is the highest in the emerging markets, the report notes.

It calls for industrial restructuring through mergers, acquisitions, amalgamations and technical collaborations.

According to the report, the prevailing high real interest rates have adversely impacted the price competitiveness of the industrial sector. While nominal interest rates have fallen, real lending rates continue to remain high. It points out that in a liberalised interest rate scenario, policy measures have a limited influence on the cost of credit.

The report expresses serious concern about the impact of high lending rates on the demand for credit in certain segments, particularly small enterprises, which have limited access to other cheaper sources of funds.

"The burden of adjustment in the financial sector seems to have fallen relatively more on small and medium enterprises owing to the segmentation of the credit markets," the report says.

High real interest rates for the industrial sector have inhibited investment and the building up of capacity in industry, it adds.

The report points out that credit flow from the banking system has significantly slowed for small scale industries and medium and large industries in the second phase of reforms.