Mumbai: Revival of investment demand will need “unclogging” of stalled investment projects, stabilising of private new investment intentions, and improving sales of commercial vehicles, RBI Governor Raghuram Rajan said on Tuesday.
The statement came as an upturn in capital goods production seems to be underway.
“Industrial production has been recovering, albeit unevenly. The sustained weakness of consumption spending, especially in rural areas as indicated in the slowdown in sales of two-wheelers and tractors, continues to operate as a drag. Corporate sales have contracted,” Raghuram Rajan said on the sidelines of the RBI monetary policy review here.
He said the “disappointing earnings performance” could have been worse if not for the decline in input costs.
“Capacity utilisation has been falling in several industries, indicative of the slack in the economy”, he said.
The Eight Core Industries, which comprise 37.91 percent of the total weight of items included in the Index of Industrial Production (IIP), fell by 0.4 percent in April 2015 at 162.4 compared to April 2014. It is for the second consecutive month that it has fallen.
The ECI index registered a negative at 0.1 percent in March 2015.
Despite the fall in the Eight Core Industries index, coal production increased by 7.9 percent in April this year in comparison to last year.
Rajan said it augurs well for electricity generation and mining and quarrying in near future.
“There is some optimism on gas pricing and availability. The resolution of power purchase processes has to be expedited and power distribution companies’ financial stress has to be addressed on a priority basis,” he said.
Talking about the public sector banks, he said some of them will need more capital to clean up their balance sheets and support lending as investment revives.
The senior banker said the leading indicators of services sector activity are emitting mixed signals.
“A pick-up in service tax collections, sales of trucks, railway freight, domestic air passenger and air freight traffic could augur well for transport and communication and trade,” he said.
However, a slowdown in tourist arrivals, railway traffic and international air passenger and freight traffic may affect the hospitality sector and some constituents of transportation services adversely.
“The services PMI declined in April 2015, mainly on account of slowdown in new business orders. Community and personal services are likely to be held back by the ongoing fiscal consolidation,” he said.
The apex bank has reduced the repo rate under the liquidity adjustment facility by 25 basis points from 7.5 percent to 7.25 percent with immediate effect.