"The recovery in Indian economic activity remains tentative and narrowly focussed in sectors such as roads, railways, power transmission and passenger vehicles.
"Notwithstanding some impending boost to consumer sentiment post revision in salaries and pensions of government employees, capacity expansion will significantly lag project announcements. Availability of budgetary outlays for financing of infrastructure may emerge as a constraint to the pace of execution in 2016-17," ICRA said in its economic update.
Capacity expansion is expected to pick up with a substantial lag as capacity utilisation improved mildly to a moderate 71.5 per cent in first quarter of current fiscal from 70.2 per cent in the same quarter previous fiscal, it said.
And decline in commodity prices and lower input costs for firms are not sufficient to revive investment plans in the absence of a pickup in demand, it added.
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Though bank credit was seen picking up at 18 per cent in April-December year-on-year basis to Rs 8.2 trillion on improved transmission of monetary easing to banks' lending rates, ICRA said.
Poor monsoon weighed on rural sentiment and demand for items such as tractors, motorcycles, cement, however, overall indicators continue to point to relatively healthier urban consumption demand led by moderation in inflation, lower fuel prices.
Lead indicators of trading activity have continued to display mixed trends as well as considerable volatility in recent months, it said.
However, implementation of the 7th Central Pay Commission would trigger a modest improvement in demand for lower ticket sized consumer durables in 2016-17, it added.