The Reserve Bank has called upon the government to cut expenditure on subsidies and "use resources so released to step up public capital expenditures".
"With limited fiscal and monetary space available to provide a direct stimulus, an expenditure-switching policy is needed that reduces revenue spending by cutting subsidies and using the resources so released to step up public capital expenditures," RBI said in its annual report for 2011-12 fiscal ended on June 30.
Flagging the twin deficits on the fiscal and current account fronts as the main fiscal concern, the report said this switching can help the government improve on both these fronts.
Admitting that its long-drawn battle against inflation through a tight monetary policy has contributed to the growth deceleration that has fallen below potential, it, however, defended the move saying price stability is needed to sustain long-term higher growth.
Attributing slowdown to a combination of domestic and global factors, the report said, "Global macroeconomic and financial uncertainty, weak external demand, elevated prices, widening twin deficits and falling investments combined to adversely impact domestic growth."
On the slowing investments, it said, "the investment climate worsened due to structural impediments, policy uncertainties inflation persistence and rising interest rates."