Prime Minister Manmohan Singh struck a downbeat note on the challenges facing the economy on Thursday, dubbing a five-year plan for average growth of 8 percent "ambitious" and warning that business-as-usual policies won't deliver higher growth.
India's GDP growth has languished below 6 percent for three straight quarters, a far cry from the near-double-digit pace of expansion before the 2008 global financial downturn.
Economic growth for the fiscal year ending in March is expected to be 5.7-5.9 percent, the slowest since 2002/03.
"I must emphasise, that achieving a target of 8 percent growth, following less than 6 percent in the first year, is still an ambitious target," Manmohan Singh told a conference of chief ministers on the government's 2012-2017 economic plan.
The downturn prodded Singh, castigated for years of policy inertia, to launch the most daring initiatives of his tenure in September that included raising subsidised diesel prices and opening the retail and other sectors to foreign players.
Analysts say the government must take more reform steps quickly, including speeding up approvals of infrastructure projects, overhauling the tax system and reducing a swollen fiscal deficit by reining in its subsidy bill.
Although some of these measures are critical for restoring the health of the economy, they have become a victim of political gridlock in New Delhi.
One of Singh's key policy advisers, Montek Singh Ahluwalia warned at the meeting that growth could get stuck at 5.0-5.5 percent if a policy logjam continues.
"The high growth scenario will definitely not materialise, if we follow a business as usual policy," Singh said, echoing his adviser.
"Our first priority must be to reverse this slowdown. We cannot change the global economy but we can do something about the domestic constraints which have contributed to the downturn."A sub-6 percent growth rate is damaging for a country that needs an 8-8.5 percent clip to create jobs for its burgeoning population.
The slump also makes it tougher for Singh to fund flagship welfare programmes ahead of a national election due by mid-2014.
"We must remember that we are still a low-income country. We need twenty years of rapid growth to bring it to middle income level," Singh said.
Low growth is making it harder for the government to narrow its fiscal gap, which global ratings agencies say must be controlled if India is to avoid seeing its sovereign debt rating being downgraded to junk.
New Delhi aims to cut its deficit to 5.3 percent of gross domestic product (GDP) in 2012/13 from 5.8 percent the previous year. But lacklustre tax revenues and high spending on subsidies have cast doubt on its deficit reduction plan.
Growth has also been dented by funding of the deficit from domestic savings, which crowds out private investment.
Singh said that subsidies on energy products should be limited, with a phased adjustment of prices.
"Unfortunately, energy is under-priced in our country. Our coal, petroleum products, and natural gas are priced well below international prices. This also means that electricity is effectively under-priced," he said.
"Immediate adjustment of prices to close the gap is not feasible, I realise this, but some phased price adjustment is necessary."