NEW DELHI (Reuters) - The beleaguered government appeared poised on Friday to push ahead with fresh measures to revive the economy after months of dithering, even as it came under heavy fire from allies and opponents alike for raising heavily subsidized fuel prices.
A cabinet committee was due to consider a proposal to allow foreign airlines to buy shareholdings in local carriers and will also discuss selling stakes in large state-run companies such as Oil India. Another committee is due to speed up infrastructure project approvals.
New Delhi is also likely to announce some spending cuts on Saturday for the 2012/13 fiscal year to March, two government sources told Reuters. They did not offer any details on the size of the cuts.
India's inability in the past months to push through major reforms and ease its subsidy burden has put it in danger of becoming the first of the big "BRICS" emerging economies to see its credit rating downgraded to junk.
"The government is quite serious to keep the fiscal deficit as close to budgeted target of 5.1 percent of GDP as possible," one of the sources, a senior finance ministry official, said.
GRAPHIC-Inflation, rates, IIP link.reuters.com/deq95s
The government's decision late on Thursday to raise diesel prices by 14 percent, the first such move in 15 months, is aimed at shoring up a weak fiscal position, but it was swiftly rejected by the opposition and allies within the Congress party-led ruling coalition who see a chance to hurt the government.
Congress appeared isolated as parties ranging from the Communists to right-wing Hindu nationalists joined householders demanding a rollback on diesel and on a cap in sales of subsidized cooking gas canisters.
In the opposition-run Odisha hundreds of activists from the local BJD party marched, brandishing cooking gas canisters. They shouted "Death to Manmohan Singh, death to Sonia Gandhi", and burnt effigies of the prime minister and Congress party leader.
"After a cut in our spending on buying vegetables and other essentials, we many now have cut down even the cooking," said Rama Devi, a housewife at a protest in the neighbouring state Andhra Pradesh, where effigies were also burned.
Similar protests earlier this year over petrol price and railway fare hikes prompted Singh to partially reverse them.
While most other G20 central banks are trying to ease monetary conditions to counter a global slowdown, the RBI has consistently flagged high inflation as a key risk to an economy where growth is faltering.
The latest measures will add to inflation in the short term, but will ultimately make it easier for the central bank to loosen monetary policy and help revive investor confidence damaged by political gridlock in New Delhi.
"It is a bold move, and will send a strong signal to the Reserve Bank of India (RBI) on the government's efforts at fiscal consolidation," said Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai.
Hopes of a immediate response from the RBI, which meets on Monday, were not helped by inflation data that showed underlying price pressures remain strong, and most economists were sticking to their forecast for no rate cut this time.
India's wholesale price index (WPI) rose a higher-than-expected 7.55 percent in August from a year earlier, mainly driven by higher food prices due to poor monsoon rains, Friday's government data showed.
The increase in diesel prices will add 60 basis points to inflation, a finance ministry official said on Friday. Diesel is widely used by transport companies and farmers.
The diesel price hike and cap on cooking gas canisters could also prove politically costly for the Congress party, whose core constituencies are farmers and the poor, in state elections due later this year.
Congress has been on the defensive for weeks over sweetheart coal deals that are now being investigated by the Supreme Court and the country's premier law enforcement agency.
The affair dubbed "coalgate" has been a boon for opposition parties, who have painted the government as corrupt, a charge Singh has strongly denied.
In the cabinet committee meetings later on Friday, ministers will look at loosening rules that bar foreign airlines from buying stakes in domestic carriers. At the moment foreign investors, excluding airlines, are allowed to hold a cumulative 49 percent. If the proposal is approved, foreign airlines would be allowed to buy similar-sized shareholdings.
Despite the higher-than-forecast inflation figure, markets were buoyed by the diesel price increase along with news of the U.S. Federal Reserve's latest stimulus plan. The BSE Sensex ended up 2.46 percent.
Morgan Stanley said the fuel price measure was "a positive development" but did not change its estimate that the fiscal deficit would reach 6.1 percent of GDP this year.
Some economists said Thursday's fuel price hike would have a marginal impact on the deficit, which in the first four months of the fiscal year was at 2.6 trillion rupees, more than half the full-year target of 5.1 percent of GDP, or 5.14 trillion rupees.
The government estimates the changes will reduce losses by about 203 billion rupees for the remainder of the fiscal year. But a reduction in excise duty on petrol may mean the net impact on government finances will be lower.
Indian demand for refined fuels is expected to rise 4 percent in 2012 to 3.4 million barrels per day, according to Purvin & Gertz, a unit of IHS consulting. Local sales of diesel, which accounts for more than 40 percent of refined fuel consumption, is estimated to rise 4 percent from a year ago to 1.4 million bpd in 2012.
Reporting by Satarupa Bhattacharjya, Tony Munroe Rajesh Kumar Singh, Nidhi Verma Manoj Kumar, Jatindra Dash and Shafeeq Mohammed; Editing by Alex Richardson and Ross Colvin