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NEW YORK (Reuters) - Finance Minister P. Chidambaram said on Wednesday he expected India's current account deficit for the 2012/13 fiscal year that ended in March to be around 5 percent of gross domestic product and perhaps half that amount in one to two years.
Chidambaram is in the United States seeking foreign investment for India's ailing economy, the third-largest in Asia, before making his way to Washington for the annual spring meetings of the International Monetary Fund and World Bank.
The Harvard-educated Chidambaram said he is close to unveiling a new initiative to remove bottlenecks in economic development projects and help convince investors India's $1.8 trillion economy is back on a high-growth trajectory.
India is seeking foreign investment to fund its account deficit, which hit an all-time high of 6.7 percent of gross domestic product in the October-to-December period, driven by heavy imports of gold and oil and by muted exports.
"The third quarter (current account deficit) was large. The fourth quarter is likely to be better and for the overall year, probably around 5 percent, maybe a shade under 5 percent," he told reporters before meeting with investors and business representatives.
Declining oil and gold prices likely helped cut the current account deficit in the fourth quarter ended March 31. A smaller deficit means less downward pressure on its currency, the rupee, which has stabilized between 54 and 55 per U.S. dollar.
"Prudence dictates the current account deficit of any country should be roughly 2.5 percent or so. It is not an agreed number," he said.
"If exports rise sharply, if the oil prices soften more quickly, the current account deficit could be contained at 2.5 percent even by next year," he said, emphasizing there is no target date for bringing down this deficit.
For graphic on India focused portfolio flows, click link.reuters.com/mut47t
Chidambaram returned as finance minister for a third time in August, and immediately launched a massive cost-cutting program.
India's gross domestic product growth hit a near four-year low of 4.5 percent in the quarter ended in December, an enviable performance when measured against the paltry growth in the developed markets.
In India's case it represented a harsh drop in GDP growth. In the fiscal year ended March 31, GDP is expected to be 5 percent versus 6.2 percent in 2011 and 9.3 percent in 2010.
"There was a massive loss of confidence among domestic investors, and among corporate investors in the Indian policymaking framework," said Jahangir Aziz, senior Asia economist at JPMorgan Chase & Co (JPM.N) in Washington.
"He squeezed spending as if there is no tomorrow in order to make sure the fiscal situation was brought under control," he said.
The IMF forecast real GDP for India in FY2013 at 5.7 percent, 6.2 percent in FY2014. Its forecast for the current account deficit is 4.9 percent in 2013 and 4.6 percent in 2014.
Chidambaram said GDP estimates for fiscal 2013/14 are in a range of 6.1 percent to 6.7 percent.
"Beyond that, it is only an aspiration. In fiscal 2014/2015, we want to go above 7 percent. Fiscal 2015/2016, we want to go back to our potential growth rate, which is above 8 percent."
Red tape and regulatory hurdles are often cited as obstacles to investing in India, and investors quizzed him on reforms.
Chidambaram told Reuters in a subsequent interview that projects were plagued by "last mile" bottlenecks in fuel supply, environment clearance, forest clearance, land acquisition.
"Now I intend to set up, after consulting with the prime minister (Manmohan Singh), some institutional mechanism for removing bottlenecks to stalled projects" in key sectors such as coal, power, steel and roads, he said.
He is working overtime to turn around perceptions that India has stagnated and to convince investors to put money to work.
"I am not looking at any number, nor am I here to sign any deals. The idea is to talk to investors. They are already invested in India," he said.
"The purpose is to make sure that they continue to remain invested in India and to increase their allocation to India."
Proposals under consideration for opening up India include raising the cap on foreign investment in rupee-denominated government debt by up to $5 billion; reducing taxes on such investments; making it easier for Indian companies to borrow abroad; and easing curbs on foreign investment in sensitive sectors such as defense, telecommunications and media.
New York investors seemed most interested in how soon the Indian parliament would pass legislation to raise the FDI cap on foreign ownership of insurance companies from 26 to 49 percent.
Other sectors up for reconsideration on foreign investment caps might include defense, print and broadcast media.
"There are many caps imposed at different points in time," Chidambaram said. A committee reviewing caps is due to make a report sometime after mid-May.
"I think many caps deserved to be either relaxed or removed."
According to Chidambaram, India's foreign direct investment inflows were $31 billion in the April 2012 to January 2013 period.
Chidambaram's push for more foreign investment, however, could make India more vulnerable to sudden reversals in capital flows.
One indication of dispirited global investors has been the net outflow from Indian-focused equity funds, which at the end of March had about $68.3 billion in assets under management.
According to Thomson Reuters Lipper service, these mutual funds and exchange-traded funds had net outflows of nearly $7 billion in calendar 2012 versus net outflows of $508 million in 2011. In 2010 there were net inflows of $1.5 billion and in 2009 $5.8 billion in net new capital was put to work in these funds.
Acknowledging the portfolio outflows, Chidambaram countered that other types of investments are counterbalancing those trends.
"Not FII's (Foreign Institutional Investment). FII's are buying," he said while drawing a picture of an upward trajectory in investment flows.
Editing by James Dalgleish, Andre Grenon and Matthew Lewis