UPDATE 2-Geithner welcomes India's new drive for reform

(Adds details and background)

By Manoj Kumar and Rajesh Kumar Singh

NEW DELHI, Oct 9 (Reuters) - U.S. Treasury Secretary TimothyGeithner welcomed New Delhi's new-found appetite for economicreform on Tuesday, barely three months after Washington hadvoiced concern about India's deteriorating investment climate.

Hailing the latest reforms as "significant", Geithner told anews conference with Indian Finance Minister P. Chidambaram inNew Delhi that the policies offered "a very promising path toimproving growth outcomes for the Indian economy".

India's economic growth has slowed to its lowest in nearlythree years and earlier on Tuesday the International MonetaryFund (IMF) sharply cut its projection for GDP growth to 4.9percent in 2012, one of the lowest official forecasts so far.

"The recent reforms advanced by Prime Minister (Manmohan)Singh and Minister Chidambaram will help provide a foundationfor stronger economic growth, an increase in investment, andmore widespread gains in income," Geithner said.

Regulatory uncertainty and policy gridlock have batteredforeign corporate investment towards India over the past year,adding to dramatic slowdown in growth.

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Foreign direct investment into India has fallen 67 percentsince the start of the 2012/13 fiscal year in April after arecord high the previous year, and investors pulled $1.93billion from India in the second quarter, helping send the rupeeto a record low.

In an interview in July, U.S. President Barack Obama saidIndia prohibited foreign investment in too many sectors, addingthere appeared to be a growing consensus in India that the timewas right for a new wave of reforms.

India has traditionally been sensitive to criticism from theUnited States, an ally but one that is viewed by some in NewDelhi with suspicion.

Chidambaram, whose appointment as finance minister in Augusthelped trigger the reforms, said that because India was "deeplylocked into the global economy" he had raised the U.S. FederalReserve's latest round of quantitative easing with Geithner.

"I raised the concern that it may impact commodity pricesand commodity prices may rise," Chidambaram said. "There isalso of course a beneficial side. Some of that money may come toIndia as investments. But we need to balance both the advantagesand disadvantages."

Chidambaram added that it was too early to conclude what theimpact of this latest round of easing, known as QE3, would be.

Under QE3 the Federal Reserve will buy bonds backed byhousing mortgages to lower interest rates and boost the economy.

Geithner said he and Chidambaram discussed how U.S. businesscould contribute to India's infrastructure and investment needs,and improving coordination on bilateral tax matters.

Foreign investors were rattled this year by proposals tocrack down on tax evasion, including levying tax retroactivelyon foreigners. They were ultimately postponed for a year afterthey spurred an exodus of funds and battered the rupee.

The reforms announced over the past month have includedraising the price of subsidised fuel to rein in the budgetdeficit, opening the retail sector to foreign supermarkets andraising the bar on foreign investment in airlines.

Although the reforms triggered the exit of an ally from theruling coalition, reducing Prime Minister Singh's government toa parliamentary minority, they have cheered investors.

India's main stock exchange index has risen 4.3percent since Sept. 13 and is up 9 percent since Chidambaram'sappointment at the beginning of August.

The greatest challenge facing Singh, however, is curbing adeficit that a government panel warned last month had taken thecountry to a "fiscal precipice" and could hit 6.1 percent of GDPthis fiscal year.

(Reporting by Manoj Kumar, Rajesh Kumar Singh, ArupRoychoudhury, Matthias Williams, Annie Banerji and ShashankChouhan; Writing by John Chalmers; Editing by Alex Richardson)

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Keywords: INDIA USA/