Prime Minister Manmohan Singh warned on Saturday that a prolonged policy logjam could slow economic growth to 5 percent, a day after the government unveiled long-delayed reforms aimed at reviving growth and preventing a credit rating downgrade.
Singh said at a planning commission meeting to finalise investment targets for the five years to March 2017 that 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.
"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," he said.
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.
Those moves came a day after the government announced a steep increase in the heavily subsidised price of diesel, setting up a showdown with the opposition as well as allies within the ruling Congress party coalition, who demand a rollback of the retail and fuel price decisions.
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.