(Adds details from Citi note, FII investment cap)
By Clement Tan
HONG KONG, Jan 22 (Reuters) - India's economy will grow "no better than" 5.7 percent in the current fiscal year but will regain traction in 2013/2014, the finance minister said on Tuesday, committing to fiscal prudence in the budget and brushing off threats of a downgrade.
P. Chidambaram was meeting international investors in Hong Kong as part of a four-city tour to try and boost capital flows into Asia's third-largest economy. He spoke to the media afterwards and Citi reported some of his presentation.
Chidambaram said he expected the economy to grow by no more than 5.7 percent in the current fiscal year ending in March, its worst perfomrance in a decade, but predicted it would pick up in the following year beginning in April, expanding by 6-7 percent.
Chidambaram is due to present the 2013/14 budget on Feb. 28. It is probably his last budget ahead of general elections due next year and he is under political pressure to be generous to voters.
"The market has been cautious leading into what is seen as an 'election/populist' budget in February 2013. The finance minister was decidedly more positive," Citi, which hosted the meeting, said in a note.
"He suggests the fiscal deficit target will be met, taxes will not be raised and while policy will and should be biased towards the poor, the budget will offer a lot."
The minister sought to allay fears India was in danger of losing its investment-grade credit rating and being downgraded to "junk" status, as policymakers struggle to revive economic growth, curb subsidies and hold down the fiscal deficit without triggering a backlash ahead of 2014 elections.
"I was not worried when I took over (as finance minister) in August 2012, and after so many steps that we have taken, I think I should be less worried. In fact, all of us should be less worried. There should no case whatsoever for anybody to downgrade India," he told reporters.
"The silver lining is we are able to finance the current account deficit without reserves. Thankfully there are enough inflows of FDIs and FIIs (foreign institutional investment) and companies are able to raise money abroad under external commercial borrowing."
Fitch and Standard and Poor's last year cut their ratings outlooks for India to "negative", citing its slowing growth and bloated deficit and putting it in danger of being the first of the BRICs grouping of fast-growing economies to be downgraded to sub-investment-grade status.
Addressing investors, he said the government would raise by $5 billion each the caps on foreign institutional investors holding government and corporate bonds, Citi said in a note after the meeting.. This was in line with market expectations, but has not yet been formally announced by the Securities Exchange Board of India.
International investors will be allowed to hold up to $15 billion of government bonds and $25 billion in corporate bonds, the minister was reported to have said during the meeting.
India's economy extended its long slump in the July-September quarter, highlighting the urgency of politically difficult reforms to revive activity.
Since Chidambaram was appointed on July 31, the government has opened up the retail sector and pushed reforms to allow more foreign investment in its insurance and pension sectors and simplify its tax laws. The benchmark BSE index has risen 16 percent in that time.
Last week, the government allowed state fuel retailers to raise prices to gradually align them with market rates and help cut its fuel subsidy bill.
The minister assured investors that the government's top priority is curtailing spending in the short term, while in the medium-term it aims to cut the fiscal deficit by 60 basis points per year, reducing it to 3 percent in four years from an expected 5.3 percent this fiscal year, the note from Citi said.
He said there was also room to sell off more state assets to ease fiscal strains. He forecast the government would raise $5 billion from such divestments in the current fiscal year and said he had approval for further sales in the next few years.
Chidambaram will also meet investors in Singapore, London and Frankfurt over the next week.
"The finance minister was both clear and confident of what needs to be done, how and when it will be done, and timelines," said a research note released by Citi said. (Additional reporting by Frank Jack Daniel and Manoj Kumar in New Delhi, Rafael Nam in Mumbai; Editing by Kim Coghill and Ron Popeski)