The pro-market minister, P. Chidambaram, said there was an “imperative need” to cut spending after a government panel warned that India stood on the edge of a “fiscal precipice” due to a swelling subsidy bill.
“It is our intention to announce a credible and feasible path of fiscal consolidation beginning this year,” he said, giving a new target for the deficit of 5.3 percent of gross domestic product.
Since taking over the finance job in July, Chidambram and 80-year-old Prime Minister Manmohan Singh have begun what some economists say are the biggest reforms in two decades since India began opening up its economy to the world.
Chidambaram said the government, which last month eased foreign investment curbs in retail, aviation and broadcasting, would keep pushing forward with reforms.
“The reform momentum will remain strong and unabated,” he said, warning without modernisation India risked a “sharp and continuing slowdown of the economy”.
India’s economy grew by 5.5 percent in the fiscal first quarter, the lowest in around three years, but Chidambaram said expansion should accelerate over the rest of the year and hoped for eight-to-nine percent expansion longer-term.
“There is no reason growth should stagnate at 5.5 percent in all four quarters,” he said, adding “the India growth story is sound.”
The government also outlined last week plans to raise foreign investment caps in the insurance and pension sectors.
Chidambaram said the insurance market needed $5-6 billion in “the immediate future” to begin covering India’s overwhelmingly underinsuranced population.
Investors have welcomed the reforms blitz that has ended years of policymaking paralysis amid massive government corruption scandals.
The stock market has jumped nearly 10 percent since the end of August while the Indian currency has gained more than five rupees against the dollar since June, trading at 52.13 on Monday, making both the best performing Asian assets.
“The rupee is stabilising,” Chidambaram said.
Ratings agency Standard and Poor’s warned in June that India could lose its investment-grade rating unless it took urgent action to balance its books, rein in public spending and boost investor confidence.
India’s fiscal outlook has been hit by a slump in tax revenues due to economic weakness and surging subsidies for India’s hundreds of millions of poor.
Chidambaram urged the main opposition Bharatiya Janata Party, which has stalled the last few parliamentary sessions, to support reforms, noting it backed many of the same policies while in government.
“There is a judgement day for every government every five years — opposition is legitimate, obstruction is not,” he said.
He said some subsidies in such areas as food, fertilisers and fuel, must remain “at this stage in India’s development”, but forecast “huge savings” with plans to make direct cash transfers to the needy and avoid widespread leakages.