PM warns against policy logjam; reforms draw protest

NEW DELHI (Reuters) - Prime Minister Manmohan Singh warned that a prolonged policy logjam could slow economic growth to 5 percent, a day after India unexpectedly unveiled long-delayed reforms aimed at reviving growth and preventing a credit-rating downgrade.

Political opponents and a key UPA ally took to the streets on Saturday to protest Friday's move to allow foreign players into the supermarket industry and Thursday's decision to increase heavily subsidised diesel prices.

"We demand a rollback of diesel prices and no FDI (foreign direct investment) in retail should be allowed. Do not attack the livelihood of small traders," Mamata Banerjee, chief minister of West Bengal, told a rally attended by thousands in Kolkata.

Investors and others who hailed the reforms worry that Singh's government, weakened by a spate of scandals, will be forced to backtrack, as it did in its last attempt last year to allow in the likes of Wal-Mart Stores Inc and Carrefour.

Banerjee, whose Trinamool Congress party has been an unreliable ally to Singh's Congress party in the coalition, said the party would "take a tough decision" if the measures were not reversed, a hint she could withdraw the party's support.

Speaking at a meeting of India's planning commission to finalise investment targets for the five years to March 2017, Singh said the government would aim for 8.2 percent annual growth over that period, down from an earlier target of 9 percent. He also outlined three potential scenarios at Saturday's meeting.

"Scenario three is called a policy logjam. It reflects a situation where, for one reason or another, most of the policies needed to achieve scenario one are not taken," Singh said.

(For Slideshow: Anti-reforms protests, click here)

"If this continues for any length of time, vicious cycles begin to set in and growth could easily collapse to about 5 percent per annum with poor outcomes on inclusion."

With Singh's embattled government long unable to push through reforms to promote investment and shore up government finances, growth in Asia's third-largest economy has slowed to 5.5 percent or below in the past two quarters.

Credit rating agencies have warned of the risk of a downgrade to "junk" status.

On Friday, the government said it was opening up its supermarket sector to foreign chains and would allow more foreign investment in airlines and broadcasters. It also approved the sale of stakes in four state-run industries.

Singh said government policy initiatives such as the hike in diesel prices were aimed at reining in a widening fiscal deficit and reviving investor sentiment.

The government projects a fiscal deficit of 5.1 percent of gross domestic product in India's nearly $1.8 trillion economy in the current fiscal year ending in March, while many private economists predict it to reach 6 percent or more.

(For Factbox: India allows FDI in retail, again, click here)

In New Delhi on Saturday, roughly 500 supporters of the main opposition Bharatiya Janata Party (BJP) protested against foreign direct investment in multibrand retail and the fuel price increase.

(Reporting by Manoj Kumar and Arup Roychoudhury; Additional reporting by Sujoy Dhar in KOLKATA; Editing by Tony Munroe and Nick Macfie)