The Reserve Bank of India has made a strong pitch for speeding up the reform process.

In its Report on Currency and Finance: 2001-02, released on Monday, the apex bank has rued that the reforms has lost momentum and the economic growth has substantially slowed down during the second half of the decade of economic liberalisation since 1997-98.

"It is imperative that the next phase of reforms should lay emphasis on the regeneration of growth in both agriculture and industry," it said.

Blaming the decleration in growth partially to the global slowdown, the report has identified loss in reform momentum and structural constraints like inadequate infrastructure and high cost of borrowed funds as the two main villains of the piece.

Three critical challenges faced by the real sector are sharp deceleration in the rate of industrial growth, a distinct downturn in domestic investment and drop in public sector savings to negative zone for the first time since 1998-99.

The most disturbing factor, the RBI says, is the steep decline in industrial growth, led by a severe slowdown in the manufacturing sector.

The services sector, according to the report, has provided a modicum of resilience to the overall growth of the economy, particularly in times of adverse agricultural shocks and industrial slowdown.

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

The companies have been called upon to speed up debt restructuring and shift from fixed to floating rate interest rates as the proportion of interest to total cost for Indian corporates is one of the highest in the emerging markets.

Dwelling on the agriculture sector, the report said bulk of the agriculture subsidies are ill-targeted and the excessive and unbalanced use of subsidised inputs can have adverse impact on the performance of agriculture.

It is in favour of reduction of most of the subsidies and said only those should be retained which are essential for social welfare.

It said that the reform process must be intensified in the agriculture sector,  factor markets, bankruptcy and exit procedures, fiscal consolidation and  physical and social infrastructures to accelerate investment.

Reforms in urban land ceiling and small-scale reservation policy, a social security blanket and a programme of retraining and redeployment of labour are also required to push the growth rate.

The potential of the economy to sustain the targeted high growth hinges critically on improvement of domestic savings rate, increased public investment, higher inflow of foreign capital and better credit delivery mechanism, it said.

Singling out high lending rates for poor credit demand in certain segments like small enterprises, the report said that the prevailing high real interest rates have adversely impacted the price competitiveness of the industrial sector.

While the nominal interest rates have fallen, the real lending rates continue to remain high. But the central banks is handicapped as "in a liberalised interest rate scenario, policy measures have limited role to influence the cost of credit".

The report said that issue of supremacy of markets over government and of the private sector over public sector is now in the realm of ideology without practical relevance.

Both market and state can fail and the practical issue is about harnessing the productive resources available in each, it said.