Diesel act to test India reforms resolve

India's beleaguered government appeared poised on Friday to push ahead with 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.

Two government sources said India was likely to announce spending cuts on Saturday for the 2012/13 fiscal year to March.

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. India'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 has already come under fire from the opposition and allies within the ruling Congress party-led coalition who see a chance to hurt the government.

One powerful coalition partner vowed street protests from Friday, and parties from Communists to right-wing Hindu nationalists joined householders demanding a rollback on diesel and on a cap in sales of subsidized cooking gas canisters.

With the increase in diesel prices, children's school bus fares are going to increase and prices of every essential items will increase. God knows how we are going to manage with our limited income, said housewife Manu Das in the northeastern state of Assam.

Similar protests earlier this year over petrol price and railway fare hikes prompted Prime Minister Manmohan Singh to partially roll them back.

While the measures will add to inflation in the short term, it 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.

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